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MACDThe MACD (Moving Average Convergence-Divergence) was developed by Gerald Appel in the late seventies; the indicator basically uses moving averages to track trend and momentum. The indicator subtracts a longer moving average from a shorter moving average creating a momentum oscillator. The MACD basically oscillates above and below a zero line as the moving averages converge, cross and diverge. Traders often use signal line crossovers, centerline crossovers and divergences to generate possible trading signals. The standard settings typically used for the MACD are the 12 period Exponentional Moving Average (EMA) for the shorter moving average and the 26 period (EMA) for the longer moving average. A 9 period EMA is also used as a signal line to identify turns in the indicator. A MACD histogram can also generated based on the difference between the MACD and the 9 period EMA (signal line). The histogram is above the zero line when the MACD is above its 9 period EMA and it falls below the zero line when the MACD is below the signal line. The MACD is an unbounded indicator; it is therefore not helpful in identifying overbought and oversold market conditions. Signal Line CrossoversSignal line crossovers occur regularly on the MACD, the more volatile the price action the greater the number of signal line crossovers. Consequently, traders must include MACD signals as part of a comprehensive technical analysis and not rely on them as their sole indicator. A bullish signal is typically generated when the MACD moves up and crosses above the signal line. A bearish signal is typically generated when the MACD moves down and crosses below the signal line. Please note that the standard signal line setting is 9 EMA, changes in this setting will produce different signals. Traders should select the appropriate settings for their trading style and instruments that they trade. Centerline CrossoversA bullish centerline crossing occurs when the MACD moves above the zero line. This occurs when the shorter period moving average moves above the longer period moving average. MACD can remain above the zero line as long as the up trend continues. A bearish centerline crossover occurs when the MACD goes below the zero line into negative territory. This takes place when the shorter period moving average moves below the longer period moving average.
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