Posted by forex at 4:43 AM
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1. Understand the calculation of moving averages. Moving average is calculated by adding up the closing prices from the last 'x' number of periods and dividing it by 'x.' The smaller the number of periods used to calculate the MA, the faster its reaction to price action.
2. Learn the default values for MACD in most charting software, which are 12, 26 and 9. The number 12 represents the number of periods to calculate faster moving average, 26 is the number of periods to calculate slower moving average and 9 is the number of periods used to calculate the average difference between moving averages.
3. Understand that the two moving average lines drawn alongside the MACD histogram are not the moving averages applied to the price. Instead, the faster moving average line represents the difference between moving averages applied to the price. The slower moving average line represents the moving average applied to the faster moving average.Using the default values, the faster line is the moving average for the difference between 12 and 26 moving average applied to the price. The slower line is the moving average for the faster line over nine periods.
4. Know that the MACD histogram represents the average difference between two MACD lines. When MACD lines cross it is an indication of a possible trend. When the moving average lines cross, the histogram temporarily disappears because the difference between lines is 0. Look for instances where MACD lines cross and the histogram value is 0.
5. Look for uptrends. If the histogram value increases from negative, toward and across 0, it is an uptrend. In terms of day trading, this is a bullish movement, which is, in effect, a buy signal.
6. Look for downtrends. If the histogram value decreases from positive, toward and across 0, it is a downtrend. In terms of day trading, this is a bearish movement, which is, in effect, a sell signal.