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Moving Average Covergence Divergence Indicator (MACD)

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  • Moving Average Covergence Divergence Indicator (MACD)

    Investing and trading using Moving Average Covergence Divergence Indicator (MACD) :

    MACD indicator is known to be the most efficient, reliable and easy to use momentum indicator. It is a tool that is used in identifying moving averages that indicate a new trend, i.e., Bearish or bullish trend. It is evident that a primary priority in trading is to be in a position of finding a trend simply because that is where most funds are found.

    As mentioned above, MACD indicator is mainly about convergence movement as well as divergence movement of two (2) moving averages. The convergence occurs precisely while the 2 averages approach each other. Divergence, on the other hand, happens while the 2 averages diverge or move apart or against each other. A twelve (12) day moving average is a responsible and faster movement for most of the MACD moves while a twenty-six (26) day moving average is less reactive and slower to price changes of a given security.

    Graphical representation of MACD.
    To show the relationship or connection between the moving averages, you come up with MACD chart which is also referred to as a histogram. You plot the deviation between the slow and fast moving averages. You will note that as the actual moving-averages diverge or separate, the actual histogram gets bigger and bigger. The movement of the faster-moving average in the chart away from the slower moving average is what is called divergence. The getting closer to the faster-moving average to the slow moving average in the histogram is what is called convergence.
    In the graph, there are three (3) numbers that are applied to set the chart
    • The first number represents the periods used to calculate and determine the faster-moving average.
    • The second number represents the number of times used in the slower moving average.
    • The third number, on the other hand, accounts for the number of bars used to calculate and determine the moving-average difference between the slower and fast-moving averages.

    How to Trade Using MACD
    Because there are only two moving averages having different speeds, the faster-moving average is quicker to change and react to the movement of price as compared to the slower one. The moment a new trend emerges, the fast line responds first and automatically cross the slower line. The happening of the crossover makes the fast line to start diverging away from the slower line. This movement indicates that a non-existing or a new trend has formed.

    Final word
    In conclusion, the MACD shows new trends in the market and finance sector. Traders can use this tool to make favorable short-term movements and directions since it gives them the ability to easily and quickly determine and identify the leadership in a nutshell term trend. The tool also shows clear signals on transactions which assist in minimizing and reducing the subjectivity in trading.