MACD
A trend indicator: the gap between two exponential moving averages (12 and 26 sessions) and its signal line.
Two averages crossing
Created by Gerald Appel in the late 1970s, MACD (moving average convergence divergence) subtracts a 26-session exponential moving average from a 12-session one. When positive, the short trend is above the long one. Its signal line (a 9-session average of MACD) and the histogram, the gap between the two, are plotted too. MACD crossing above its signal is read as a buy signal.
- EMA
- exponential moving average, which gives more weight to recent sessions.
Reading a histogram
- 12-session average: 105.2; 26-session average: 103.0.
- MACD: 2.2; signal line: 1.8.
- Histogram: +0.4, positive and rising for three sessions.
Upward momentum is building; a shrinking histogram would signal it fading.
Common mistakes
- Following every crossover in a trendless market: false signals multiply.
Questions and answers
MACD or RSI?
MACD follows the trend, RSI measures overbought or oversold levels. They are often combined: trend confirmed by MACD, entry chosen with RSI.
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