The MACD indicator shows the difference between two exponential moving averages; thus it is calculated by subtracting the 26 period exponential moving average (EMA) from the 12 period EMA. Additionally, a 9-period EMA of the MACD itself is formed as a signal line.
There are various ways of how the MACD indicator may be utilised, but one of the simplest ones is based on the crossovers between the MACD line (orange line) and the signal line (red line).
Buy signals are generated when the MACD line crosses over the signal line from the bottom, and sell signals are generated when the MACD line crosses over the signal line from the top.
In the above screen, two examples of buy signals and three signals of sell signals were generated by the indicator.
Similarly to other indicators, oscillators and various technical analysis tools, the MACD tends to generate false signals. In order to decrease the probability of generating sell false signals, the MACD may be used with other tools. When all the used technical tools indicate the same direction for the market, then this increases the probability of the success of the trade.
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