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Technical Analysis: Power Tools for Active Investors by Gerald Appel

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The Basic Construction of the Moving Average Convergence-Divergence Indicator

Chart 8.1 illustrates the construction and the basic underlying concepts of MACD.

Chart 8.1. The New York Stock Exchange Index 2002: Introducing the MACD Concept

The MACD indicator is created by subtracting a longer-term exponential moving average from a shorter-term exponential moving average of prices or other measures of the vehicle that you are tracking. MACD generally rises if shorter-term trends are gaining strength and generally declines if shorter-term trends are losing strength. The lower scale on the chart is a histogram that measures the difference, a 12-day exponential minus a 26-day exponential average of the New York Stock Exchange Index.

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