MACD (moving average convergence / divergence)
The MACD is very well useable in markets with a clear trend and is made up of combined moving averages. The MACD can confirm the strength of a trend or nullify it.
How does the MACD work?
The MACD is the average of the 12 and 26-day average. From these averages a new line is drawn by subtracting the 26-day average from the 12-day average. If the line is located above zero it indicates a buying signal, and if the line is situated below zero it indicates a selling signal.
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Application of the MACD
When there is convergence between the MACD and the price, it is safe to trade with the trend. During an uptrend, the MACD should therefore rise accordingly with the share price. During a downtrend, the MACD should decline accordingly with the falling share price.
In case of divergence the MACD does something unexpected and moves in the opposite direction of the price. In an uptrend, the MACD moves down, and in a downtrend the MACD moves up. Be aware that in this case there is a fairly high probability that there will be a reversal!
Using the MACD in a safe manner
Use the MACD in combination with other indicators. The MACD is rather a confirmation of the current trend and is on its own not very suitable for opening positions. In the end, candlesticks, moving averages, and trend lines are much more important for that!