The moving average convergence-divergence (MACD) oscillator, developed by Gerald Appel, is built on exponentially smoothed moving averages. The MACD consists of two exponential moving averages that are plotted against the zero line. The zero line represents the times the values of the two moving averages are identical. In addition to the signals generated by the averages' intersection with the zero line and by divergence, additional signals occur as the shorter average line intersects the longer average line. The buying signal is displayed by an upward crossover, and the selling signal by a downward crossover.
A typical MACD combination consists of a 26-day a 12-day EMA. The MACD line is evaluated by subtracting the longer period EMA from the shorter EMA.
This creates a momentum oscillator around the horizontal equilibrium line (zero-line) which represents the points at which the EMAs are having the same value.
The default time span used for daily charts (26/12 with a 9-day signal line) appears to work better on monthly ones because it manages to retain the primary trend swings yet the signal line whipsaw crossovers are kept to a minimum. Finally, why EMA ? Can we usethe Linearly Weighted Moving Average . The answer is it is possible and may work very well for your particular strategy. However, the commonly accepted practice for MACDs is the use of the EMA.
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