MACD – Moving Average Convergence Divergence

Yet another indicator based on moving averages. MACD is a trend momentum indicator that is easily calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The result is then plotted below the price data window. The second element of the MACD is a so-called trigger line (red line in image below), which is a 9-period EMA that is displayed in the same window on top of the MACD. Depending on the value of the MACD indicator and the position of the trigger line in relation to the MACD, this indicator can provide great trade entry/exit signals.

When MACD rises above the trigger line, the uptrend momentum is intensifying, so we may interpret this as a buy signal. On the other hand, when MACD crosses the trigger line falling below it, we could enter a short position, because the trend momentum is decreasing. Also, an MACD value greater than zero means that upward momentum is building up, while MACD below zero means that downward momentum is building up.

When there is a divergence between MACD and the direction of the market, meaning that the direction of the MACD is in direct contradiction to the direction of the price movement, the indicator is signaling that the trend is ending.

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