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Moving averages typically represent the average price over time of an asset. The default moving averages offered by a trading platform can be used by traders, or they can define their own. This will depend on the trading parties’ respective time horizons.
Between simple moving averages and exponential moving averages, we further distinguish. While an exponential moving average gives more weight to recent price movements, a simple moving average takes the arithmetic mean of prices over a time period.
Moving averages alone are generally very straightforward and popular indicators that let traders confirm trends and pinpoint important price levels. Two different moving averages are combined in the MACD.
It aids in determining the magnitude, direction, and strength of momentum. It is a trend-following, lagging indicator because it is dependent on moving averages.
The MACD line and the signal are the two lines that make up the indicator, as can be seen above. The MACD line is calculated by deducting the 12-period EMA from the 26-period EMA (period refers to the intervals traders define on their trading chart).
The 9-Period EMA alone serves as the signal line. The MACD line, for instance, would be 12-day EMA – 26-day EMA when a trader uses the indicator on a one-day chart, while the signal line would be the exponential moving average of the previous nine days.
The MACD histogram, which fluctuates above and below zero to help distinguish between bullish and bearish momentum, is represented by the green and red bars in the indicator. It is merely the signal line’s distinction from the MACD line. The histogram is positive if the MACD is higher than the signal line.
A sign of growing momentum is when the MACD is positive and the histogram is rising. In these circumstances, the price typically increases, producing a buy signal, and vice versa.