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Profitable Day and Swing Trading: Using Price / Volume Surges and Pattern Recognition to Catch Big Moves in the Stock Market, + Website by Harry Boxer

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CHAPTER 12

Moving Average Convergence/Divergence

Moving average convergence/divergence (MACD) is a technical analysis indicator created by Gerald Appel in the late 1970s. It is used to spot changes in the strength, direction, momentum, and duration of a trend in a stock’s price.

The MACD “oscillator” or “indicator” is a collection of three signals (or computed data series), calculated from historical price data, most often the closing price. These three signal lines are: the MACD line, the signal line (or average line), and the difference (or divergence). The term MACD may be used to refer to the indicator as a whole or specifically to the MACD line itself. The first line, called the MACD line, equals the difference between a “fast” (short-period) exponential moving average (EMA) and a “slow” (longer-period) EMA. The MACD line is charted over time, along with an EMA of the MACD line, termed the signal line or average line. The difference (or divergence) between the MACD line and the signal line is shown as a bar graph called the histogram line.

A fast EMA responds more quickly than a slow EMA to recent changes in a stock’s price. By comparing EMAs of different periods, the MACD line can indicate changes in the trend of a stock. By comparing that difference to an average, an analyst can detect subtle shifts in the stock’s trend.

Moving averages and the MACD are examples of trend following, or “lagging,” indicators. These indicators are superb when prices move in relatively long ...

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