Moving Average Convergence Divergence (MACD)

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In the late 70s, Gerald Appel developed the Moving Average Convergence-Divergence (MACD). It is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, the MACD offers the best of both worlds: trend following and momentum.

The MACD moves in a fluctuating style above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because the MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.

Below is an example chart with the MACD indicator 

The values of 12, 26 and 9 are the typical setting used with the MACD, however other values can be substituted depending on your trading style and goals.