What is the 'Moving Average Convergence Divergence  MACD'
Moving average convergence divergenceÂ (MACD) is a trendfollowing momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26day exponential moving average (EMA) from the 12day EMA. A nineday EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
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BREAKING DOWN 'Moving Average Convergence Divergence  MACD'
There are three common methods used to interpret the MACD:
1. Crossovers  As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering into a position too early, as shown by the first arrow.
2. Divergence  When the security price diverges from the MACD. It signals the end of the current trend.
3. Dramatic rise  When the MACD rises dramatically  that is, the shorter moving average pulls away from the longerterm moving average  it is a signal that the security is overbought and will soon return to normal levels.
Traders also watch for a move above or below the zero line because this signals the position of the shortterm average relative to the longterm average. When the MACD is above zero, the shortterm average is above the longterm average, which signals upward momentum. The opposite is true when the MACD is below zero. As you can see from the chart above, the zero line often acts as an area of support and resistance for the indicator.
Are you interested in using the MACDÂ for your trades? Check out our ownÂ Primer On The MACD and Spotting Trend Reversals With MACD for more information!

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