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Moving Average Convergence/Divergence is the next
The Moving Average Convergence/Divergence Technical Indicator is the difference between a
The MACD proves most effective in
Crossovers
The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the Moving Average Convergence/Divergence rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero.
Overbought/oversold conditions
The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels.
Divergence
An indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bullish divergence occurs when the Moving Average Convergence/Divergence indicator is making new highs while prices fail to reach new highs. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.
Calculation of MACD
The MACD is calculated by subtracting the value of a
MACD = EMA(CLOSE,
SIGNAL = SMA(MACD, 9)
Where:
EMA — the Exponential Moving Average;
SMA — the Simple Moving Average;
SIGNAL — the signal line of the indicator.
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