MACD is a mathematical indicator used by traders to predict future price movements of financial instruments. It uses two exponential moving averages and attempts to measure both price trend and momentum. Bullish and bearish signals can be generated by crossovers or divergences. MACD is a lagging indicator and can be used with different frequencies of data.
MACD is an acronym for Moving Average Convergence Divergence. It is a mathematical indicator used by some financial traders to predict the future price movements of stocks, commodities, and other financial instruments. This indicator was originally developed by Gerald Appel.
The MACD is built from two EMAs, or exponential moving averages, derived from the historical price movement of the asset being studied. In a traditional average, all data is treated equally. When calculating an EMA, some data has greater weight or importance than other data. In the case of MACD, the more recent the data, the more importance is given to it. A six EMA, for example, averages the last six values and gives more weight to the most recent ones.
This indicator subtracts the longer average from the shorter average, and the result is represented in a chart or graph. MACD generally uses the 26 and 12 day EMA, which means that it looks at the last 26 and 12 days of data. The resulting graph oscillates around zero, with no preset limits in the upper or lower directions. In addition to the difference between the means, the values are averaged to produce a center or activation line.
MACD attempts to measure both price trend and momentum, where momentum can be thought of as the strength of the trend. If the number is greater than zero, it means that the short-term average is higher than the long-term average, which suggests that the financial instrument is in an upward trend. Similarly, if it is less than zero, it suggests that the instrument is trending down. The steeper the slope of the MACD diagram, the more violently the price moves and therefore the stronger the momentum.
Bullish and bearish signals can be generated by crossovers or divergences. A divergence occurs when the MACD indicates a move in one direction while the price of the asset moves in the other. A crossover is simply the MACD moving above or below the zero (neutral) point, or alternatively, crossing its own trigger line. A positive to negative line crossing would be a bearish signal, while a negative to positive crossing is a bullish signal.
Because MACD uses lagging data, it is, by definition, a lagging indicator. By using shorter averages, the lag can be reduced, but never eliminated. Conversely, lengthening the averages used in the calculation dampens line movements and increases delay. While MACD is most often used with data on a daily frequency, it can also be used with weekly, monthly, or even yearly data.
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