What is MACD?

Moving average convergence divergence or simply MACD.

Moving average convergence divergence or simply MACD is a trading tool that was developed by Gerald Appel. MCD is one of the most interesting and peculiar technical indicators. Its uniqueness lies in the fact that it can successfully functions as a new trend tracker as well as a kind of an oscillator. Not a lot of trading tools can be this versatile. Although it is still up for debate between traders what function of MACD is primal.

MACD comes in handy when we want to understand the trends and the way they are going to be interchangeable with one another. It is extremely important because understanding trends is one of the most important tools there is in terms of making money off forex trading.

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MACD has three number parameters. Usually they are preset in your trading platform to 12, 26 and 9. Here 12 is the number that is used in order to calculate the faster-moving average; 26 is used to calculate the slower moving average and 9 is the difference between the two of them.

If you want, you can look at it this way – 12 is the number of the previous 12 bars of the faster                moving average. 26 is the number of the previous 26 bars of the slower moving average. 9 is the number of the previous 9 bars of the difference between the two moving averages.

Usually next to a MACD chart you can also see a histogram. The longer are the histogram lines the further away the averages were. This is called divergence. The name derives from the fact that the longer the histogram line is, the further the fast moving average went away from the slow moving average.

In case the two averages cross together, when for example the fast moving average picks up a new trend and it still takes time for a slow moving average [hey, they do live up to their names] and the fast moving average goes up as the slow moving average gest to it in time, the bar on the histogram disappears or a while as the difference between the two adds up to 0.

Convergence on the other hand is when the faster moving average is getting closer to a slower moving average – so the situation if divergence is reversed.

MACD are fairly easy to read, although the graph does not always live up to the real situation in the market. There will be tons of times when you are going to see the trends going down, but the price moving up. That is one flaw in the system, as the averages are calculated against the average price for all times and for the current situation.

I know that all of this is very important to trading and to general knowledge of your field, but I just have to ask – do we need to know everything by heart?

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