Moving Average Convergence/Divergence

The third indicator is known as the Moving Average Convergence/Divergence (MACD) indicator. MACD was developed by Gerald Appel. MACD is constructed using two exponential moving averages. The faster line (known as the MACD line) is difference between the two exponential moving averages, typically 12-day and 26-day or weeks). The slower line (known as the signal line) is usually a 9 period exponential moving average of the MACD line.

When the faster MACD line crosses above the signal line, it is a buy signal. The crossing of the faster line below is a sell signal. Additionally, MACD has a value that fluctuations around a zero value line. When the MACD value rises too far above the zero line, it becomes overbought and when the MACD value declines too far below the zero line it indicates oversold. Crossings above and below the zero value line are another way to indicate buy and sell signals respectively.

Next: Building Blocks of Technical Analysis: Price Patterns - Reversal Patterns


    Table of Contents
  1. Introduction
  2. Technical Analysis Explained
  3. Building Blocks of Technical Analysis: Charts
  4. Building Blocks of Technical Analysis: Trendlines
  5. Building Blocks of Technical Analysis: Moving Averages
  6. Building Blocks of Technical Analysis: Indicators - RSI
  7. Building Blocks of Technical Analysis: Indicators - Bollinger Bands
  8. Building Blocks of Technical Analysis: Indicators - MACD
  9. Building Blocks of Technical Analysis: Price Patterns - Reversal Patterns
  10. Building Blocks of Technical Analysis: Price Patterns - Continuation Patterns
  11. Conclusion
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