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Gerald Appel created the moving average convergence divergence, or MACD, as a refined version of the two moving averages system. The moving average, traditionally a lagging, trend-following indicator, is combined with another moving average and transforms into a leading momentum indicator. Appel's indicator is simple, yet its impact cannot be overstated. The MACD offers traders and analysts trend following and momentum all in one easy-to-use package. Since its introduction, the MACD has become one of the most important and popular tools of technical analysis.

MACD values are dynamically plotted above and below a zero center line, making it an oscillator that generates clear, actionable signals. Its primary function is to identify and profit from divergences between its 12-day and 26-day exponential moving average (EMA) lines. The 26-day is subtracted from the 12-day, although the specific length of either line can be adjusted to fit a specific security or trading strategy. Some traders even add a moving average of this value, creating a momentum trendline within the trend momentum signals.

Crossovers and divergences between the two lines show reversals, retracements or weak trend momentum. Whenever both moving average lines are moving in the same direction, but the short-term moving average is moving with a steeper slope, traders can interpret this to mean the current trend is strong and/or is growing strength.

When the standard moving average time intervals are used, the MACD functions primarily as a short-term trend trading tool, and the use of EMAs aims to reduce any lag. Larger trends can be spotted by either increasing the time intervals or by adding another technical indicator into the analysis. Even though this tool is incredibly popular and highly trusted, it is not without limitations. The most concerning weakness involves the MACD's sensitivity and proclivity toward whipsaws. Combat these liabilities by adding confirmation tools to your trading strategy.

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