MACD stands for moving average convergence or divergence, and is a technical indicator that was first created in the 1970s. The MACD shows differences between a slow and a fast EMA closing prices or exponential moving average. Since the MACD is based on the moving averages, it can sometimes be less than accurate.
When it comes to trading software, MACD is useful because it can find trend changes. The MACD is generally seen as a histogram or even an oscillator at times, so there are 3 signals created including the MACD line crossing the signal, the MACD crossing 0, and there being a difference between price and the histogram or between MACD line and the actual price. The signal line crossing is the normal trading rule, as many people believe you should buy when the MACD crosses the signal line going up, or you should sell when it goes down through the signal line.
When the MACD is used in trading software, this helps to keep you up to date with the current trends of the market, and the trading software will also help you to understand the MACD changes. If you are using smart trading software, it can alert you to the best times to buy and sell based on the MACD histogram. If you are using a normal trading software, the MACD will simply give you more information so you can make a better informed decision on your trades.
To calculate the MACD, the standard periods are used of 12 days and 26 days. MACD is equal to the EMA multiplied by 12 price, subtracted from EMA multiplied by 26 of price. The appearance of this equation is as follows: MACD= EMA (12) price-EMA (26) price. Then a shorter trigger line is made with another EMA of 9 days. The equation is as follows: trigger= EMA (9) of MACD where the MACD is the answer from the last equation.
Since trends are where the most money is normally made using trading software, using the MACD to find the moving averages makes sense. The MACD finds new trends and alerts you to these trends so that you can use the trading software to sell or buy according to trends. When you are using the MACD charts, there are 3 numbers to pay attention to. The first is the number of periods that are being used to create the fast average, the second is the number of periods for slow average and the last number is the amount of bars used to make the moving average. The moving average is the difference between the fast and the slow averages.
When a new trend has been found, it generally will be seen as the fast line crossing the slow line. When the fast line moves away from the slow line, the trend is seen. There are downsides to using the MACD with your trading software. This includes the fact that moving averages are not accurate with the actual price, since it is simply an average of historical pricing. The MACD shows moving averages, it can lag behind the actual pricing on the market.
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