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Probably you had seen this chart on your FOREX trading software and wondered what all those lines and measures mean. MACD is a chart that shows the average of the differences between two moving averages. On the charts you can see two lines on an open scale against the zero line, a fast one and a slow one. Those lines tells you the difference between the original two moving averages, and the moving average of the difference. On the chart each one of the two lines will be defined by a different color, or alternatively one line would be solid and the other one dotted. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving averages as the signal line. On the chart you’ll see only two lines even though there are three moving averages mentioned. If the faster line crosses above the slower line then it is recommended that you buy, and vice versa. Another indicator this chart offers for FOREX users is that as long as both the lines are above the zero the more overbought the currency becomes, and as long as both lines are underneath the zero is the more oversold it would become. It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold. In case that the MACD is making new lows and the price of the security is not making new lows there is a divergence. Also, if the MACD has made a high and starts heading down yet price continues growing, it is clearly a bearish divergence and by using this information you can predict a change in the direction. MACD is commonly used as an indicator for divergence. For conclusion MACD in a common tool FOREX traders and investors use for analysis and for forecasting the market's behavior. Using it wisely it can help you generate a nice profit.
Article Source: http://www.financemanual.com
Mia Milis is an independent trader and provides financial advice regarding foreign exchange to several institutions as well as private individuals. Being an Internet enthusiast, she has taken up to provide advice through her brilliant articles, and in recent years has also founded theforexblogger.com in order to provide a platform online traders worldwide could share experiences through. www.theforexblogger.com.
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