Moving Average Convergence Divergence (MACD)

The first three oscillators we discussed all use line charts to represent the reading. But the Moving Average Convergence Divergence (MACD) indicator is a completely different beast as it combines two Moving Average Crossover with Histogram to gauge the strength of the momentum.

The two lines of the MACD represent a 12-period EMA and a 26-period Exponential Moving Average (EMA). When the shorter period EMA crosses the longer period EMA, it signals a change in trend, just like a typical MA crossover. But, what makes MACD truly standout is the histogram that measures the distance between these two EMAs. When the histogram is above the 0 line and increasing, it signals an uptrend that is gaining momentum. On the other hand, when the histogram is below the 0 line, it signifies that the downtrend is gathering strength.

Unlike the Stochastics, RSI, or CCI, there are no predetermined overbought or oversold levels in the MACD oscillator. However, the trick is to compare the highs and lows in MACD to price action in relation to previous high and lows. In doing so, you can easily find convergence and divergence.

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