Understanding MACD in Technical Analysis
Moving Average Convergence/Divergence or “MACD” is one of the primary indicators used in technical analysis. The MACD, created in the late 1970s, can help investors to uncover changes in stock price momentum, strength and direction by illustrating the difference between slow and fast exponential moving averages (EMA). This difference is plotted on a chart over time along with a moving average that plots the difference.
How to Calculate MACD
MACD refers to both the line created and the indicator itself. The mathematics for MACD work as follows:
While moving average periods used in MACD can differ, the most commonly used are 12 days for the faster and 26 days for the slower. The signal line represents the difference between the slower and the fast and the parameters used would be expressed as MACD (12, 26, 9).
Interpreting MACD
As you may know, an exponential moving average (EMA) differs from a simple moving average due to its giving more importance or “weight” to the more recent data. MACD helps gauge changes in price trends of a stock. Subtle changes in price trends can then be identified by looking at the differences in the change and comparing against the average. Meaningful MACD signals can include:
An overbought condition may also be indicated whenever there is a drastic rise in the MACD. In this situation, the shorter-term moving average pulling away from the longer moving average can indicate an overbought situation and the expectation that selling activities will bring the price back down to its usual levels.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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