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Trading and Investment Terms

MACD

Developed by Gerald Appel in the late seventies, the Moving Average Convergence/Divergence oscillator (MACD) is one of the simplest and most effective momentum indicators available. 

 

The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter one.

The MACD indicator is made up of three components:

  • The MACD line, which measures the distance between two moving averages
  • The signal line, which identifies changes in price momentum and acts as a trigger for buy and sell signals
  • The histogram, which represents the difference between the MACD and the signal line

 

MACD Line = (12-period EMA – 26-period EMA)

Signal line = 9-period EMA

Histogram = MACD Line – Signal Line

 

Calculation

An approximated MACD can be calculated by subtracting the value of a 26 period Exponential Moving Average (EMA) from a 12 period EMA. 

The shorter EMA is constantly converging toward, and diverging away from, the longer EMA. 

This causes MACD to oscillate around zero levels. A signal line is created with a 9 period EMA of the MACD line.

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