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Thread: Moving Average Convergence Divergence (macd)

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    Default Moving Average Convergence Divergence (macd)

    Characteristic: Trend Direction
    Parameter Defaults: First EMA Period 12 controls the measurement period for the short average
    Second EMA Period 26 controls the measurement period for the long average
    Signal EMA Period 9 controls the measurement period for the signal average
    Plots: MACD The MACD line
    MACD_Signal The signal line for MACD
    MACD_Hist The spread between the MACD and Signal

    The MACD indicator was developed by Gerald Appel and is simply a method of identifying the potential for two exponential moving averages to cross. MACD is calculated using a short length and a long length exponential moving averages (defaulted to 12 and 26) and calculating the difference between these two averages. In other words, it is the spread between the two averages. A signal line is then derived by calculating an exponential moving average of the MACD. This is plotted as the MACD Signal. Finally, the difference between the MACD and the MACD Signal is calculated and plotted in a histogram as the MA Hist.

    The MACD is often used as a trend-following indicator, and may be interpreted similarly to other moving averages. That is, when the MACD crosses above the MACD Signal, an uptrend may be beginning, indicating a buy signal. Similarly, when the MACD crosses below the MACD Signal, a downtrend may be beginning. As an oscillator, the MACD can signal overbought and oversold conditions though there is no method to identify overbought and oversold conditions.

    However it must be noted that while MACD is often used as a trending indicator, when price direction slows it will result in the spread between the two exponential moving averages reducing, thus causing the MACD line to decline in the case of an uptrend or rise in the case of the down trend. This will cause losses if MACD is utilized for crossovers of MACD line across the Signal line

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    Default

    Just Added Information about MACD
    from http://www.metaquotes.net/techanalysis/indicators/macd



    Moving Average Convergence/Divergence is the next trend-following dynamic indicator. It indicates the correlation between two price moving averages.
    The Moving Average Convergence/Divergence Technical Indicator is the difference between a 26-period and 12-period Exponential Moving Average (EMA). In order to clearly show buy/sell opportunities, a so-called signal line (9-period indicators` moving average) is plotted on the MACD chart.
    The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the Moving Average Convergence/Divergence: crossovers, overbought/oversold conditions, and divergences.

    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 26-period exponential moving average from a 12-period exponential moving average. A 9-period dotted simple moving average of the MACD (the signal line) is then plotted on top of the MACD.
    MACD = EMA(CLOSE, 12)-EMA(CLOSE, 26)
    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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