What is The MACD Indicator and Benefits You Can Obtain from it?

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One of the most common technical indicators that is used by day traders in financial markets can be seen in the Moving Average Convergence Divergence - more commonly known as the MACD. But a mistake that many new traders make is that just going to start using this indicator without really understanding how it works or does his calculations. This can lead to costly mistakes that should have been entirely preventable. Therefore, it makes sense to study the logic and calculations behind the MACD (and all other indicators) in order to more accurately set their negotiating positions day and generate profits on a consistent basis.

The Moving Average Convergence Divergence (MACD) Defined
Anyone with experience in the forex markets and technical analysis strategies have probably heard a lot about the moving average convergence divergence (MACD). But what the MACD tells us - and how is it calculated? Without an understanding of these areas, it may be difficult to see trading signals emerging. Here, the MACD indicator deconstruct and explain how and why it is commonly used. 

"In its most basic form," said Haris Constantinou, market analyst TeleTrade "MACD is a momentum indicator that is designed to follow existing trends and find new ones." The MACD does this to show the differences and relationships between the two-level combination of the averages and the actual price action moving.

MACD Calculations

To determine and calculate the MACD, we subtract a 26 period exponential moving average (EMA) from a 12 EMA. Then, 9 period EMA of MACD is plotted this becomes the signal for the indicator. The signal line is plotted on the MACD and this will be used as the trigger to read trading signals (both buy signals and sell signals). These elements form the basis of the construction MACD, and it is important to have a solid understanding of these items if you plan to use in their daily trading indicator.


Three Common Approaches to the MACD


Now that we understand the basics of how the MACD is calculated, it is a good idea to look at some of the most common ways that the MACD is seen by traders so we can have an idea of exactly how the indicator is used to identify trade opportunities . There are a few different ways the indicator can be interpreted, and the three of the most common methods proved the most effective for merchants include crossover, divergence, and the identification of the conditions of overbought / oversold 
Since the indicator has become an important part of the technical trading community, is a good idea to look at some of these approaches further. But before you can do this, it is essential that you understand the basics. Otherwise, it is leading to a large number of losses for many traders who are just getting started.