The moving average convergence divergence (MACD) is a technical trading tool used to detect changes in trends of asset prices. It is calculated by subtracting a 26-day exponential moving average from a 12-day exponential moving average and is often used with a signal line to determine when to buy or sell an asset. Traders use three techniques to evaluate and interpret the convergence-divergence of the moving average: crosses, divergence, and zero line crossing. Traders typically look at the weekly MACD scale before executing short-term trades.
Trader Gerald Appel devised the moving average convergence divergence (MACD). It is a technical trading tool that demonstrates the association between two moving averages of asset prices, such as commodity or stock futures. The MACD is often referred to as a trend-following indicator. It is mainly used by traders to detect changes in the most recent trend. This technical trading tool is generally not used by traders in markets that are locked in a trading range.
The MACD is calculated by subtracting a 26-day exponential moving average or EMA from a 12-day exponential moving average. A more accurate interpretation of the moving average convergence divergence is that the two lines represent a moving average that is the difference between both moving averages. A signal line is drawn at the top of the MACD. It is used as a means of determining when to buy or sell an asset. The standard signal line is calculated as a nine-day exponential moving average. Also called the activation line.
Basically, there are three techniques that are used to evaluate and interpret the convergence-divergence of the moving average. They are: crosses, divergence and zero line crossing. Crosses can be bullish or bearish. When the MACD falls below the signal line, this bearish signal is an indication that it may be time to sell the asset. On the other hand, a MACD rising above the signal line is bullish and an indication that prices may be rising. It is a signal to buy.
Divergence occurs when the asset price moves opposite the moving average convergence divergence, which is a sign that the current trend has ended. The zero line crossing occurs when the MACD line rises through the center line, which is zero. This is a bullish sign and can be a buy signal for traders. MACD lines falling through the zero line are bearish and therefore a sell signal for many traders. Most technical traders use moving average convergence divergence as one of the many tools in their trading arsenal.
Typically, traders will look at the weekly MACD scale to get an intermediate view of the market before looking at the daily scale. This ensures that the trader does not execute short-term trades that go against the prevailing intermediate trend. Many traders take extra precautions by implementing a price filter before executing bullish trades on the moving average crossover. For example, they may require the convergence divergence of the moving average to rise above the nine-day EMA. You must stay there for a minimum of three days; At the close of the third day, the buy signal is issued.
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