The Worlds Greatest Trading Tool - MACD - Moving Average Convergence & Divergence

The MACD--moving average convergence divergence--indicator is popular among traders and analysts, yet few really understand it.
The Moving Average Convergence/Divergence indicator is a momentum oscillator primarily used to trade trends. Although it is an oscillator, it is not typically used to identify over bought or oversold conditions. It appears on the chart as two lines which oscillate without boundaries. The crossover of the two lines give trading signals similar to a two moving average system.

Divergence on the MACD is one of the ways the indicator is used and takes two forms. When the price of an asset is moving one direction and the MACD in the other, that's divergence. This type of signal is supposed to warn of a reversal, but as discussed below, the signal is random and often inaccurate.

Another type of divergence is when the price makes a new high (or a new low), but the MACD doesn't. Traditionally this indicates the price is losing momentum and prime pickings for a reversal. This also tends to be a very poor trading signal.

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