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MACD

Moving Average Convergence/Divergence. The crossing of two exponentially smoothed moving averages. They oscillate above and below an equilibrium line.The Moving Average Convergence/Divergence indicator (MACD) is calculated by subtracting the value of a 0.075 (26-period) exponential moving average from a 0.15 (12-period) exponential moving average. A 9-period dotted exponential moving average (the signal line) is automatically displayed on top of the MACD indicator line. The basic MACD trading rule is to sell when the MACD falls below its 9-period signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. A variation of the MACD can be created by plotting the following formula:

macd( ) mov(macd( ), 9, E).

Then change the indicator line style to a histogram, and plot a 9-period dotted moving average of the indicator. In a system test of this indicator, sell arrows are drawn when the histogram peaked and turned down and buy arrows are drawn when the histogram formed a trough and turned up.

The MACD is used to determine overbought or oversold conditions in the market. Written for stocks and stock indices, MACD can be used for commodities as well. The MACD line is the difference between the long and short exponential moving averages of the chosen item. The signal line is an exponential moving average of the MACD line. Signals are generated by the relationship of the two lines. As with RSI and Stochastics, divergences between the MACD and prices may indicate an upcoming trend reversal.

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