MACD is an acronym for Moving Average Convergence Divergence. It is a tool used to identify moving averages that are indicating a new trend, whether it's bullish or bearish.
With an MACD chart, you will usually see three numbers that are used for its settings.
- The first is the number of periods that is used to calculate the faster moving average.
- The second is the number of periods that are used in the slower moving average.
- And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.
Because there are two moving averages with different “speeds”, the faster one will obviously be quicker to react to price movement than the slower one. When a new trend occurs, the fast line will react first and eventually cross the slower line. When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often indicates that a new trend has formed.
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