Moving Average Convergence / Divergence

The MACD is a momentum-based technical indicator that helps traders assess the direction and strength of a trend. It is derived from two exponential moving averages (EMAs) - typically the 12-period and 26-period - and plots their difference as the MACD line. A secondary line, called the signal line (usually a 9-period EMA of the MACD), is used to generate buy or sell signals when crossovers occur. When the MACD line crosses above the signal line, it suggests bullish momentum; when it crosses below, it indicates bearish momentum. Below are two recent examples: the first illustrates an upward trend, while the second highlights a decline - both chosen to clearly demonstrate how to interpret the MACD chart.

Key Concepts:

  • MACD crossovers signal momentum shifts: A bullish crossover (MACD line above signal line) often marks the start of a swing move.
  • Mind the gap: Expanding distance between lines means increasing momentum, while shrinking area warn of fading power.
  • Pair with RSI for timing: Use RSI to confirm MACD signals and avoid entering trades during overbought or oversold extremes.
  • Divergence flags reversals: If price makes a new high but MACD doesn’t, it can signal weakening momentum and a potential pullback.
  • Combine with support/resistance zones for higher probability setups.
Next Lesson: Relative Strength Index

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