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The MACD is both a trend-following and a momentum indicator. It computes the difference of two Exponential Moving Averages (EMAs) and plots the data in a momentum oscillator.
Convergence occurs when the two EMAs are moving towards each other, which means that the difference between them is getting smaller. On the other hand, divergence occurs when they are moving away from each other, which means that the difference between the EMAs is getting larger.
As you can see, the MACD has 3 parts. First is the zero line or the centreline. Second is the histogram, which represents the distance between the slow and fast EMAs, and thus shows the degree of convergence or divergence between the EMAs.
The third part is the MACD SMA, which is basically a Simple Moving Average of the difference of the slow and fast EMA, and in this case is equal to the histogram because it is set to 1.
The MACD has two zones. When the price is going up and the histogram is above the zero line, it is in the positive zone. It serves as a strong indication that the trend is up.
Basically, when the histogram is crossing the zero line going upwards, it is a buy signal.
However, if the histogram is below the zero line, it is in the negative zone, which means that the current trend is down. So, when price is crossing down below the zero line, this is considered a sell signal.
I usually work on the 1H chart, which suits my trading style during my daily routine. Sometimes, I trade on the 4H chart too, that’s usually if I am too busy at my daily job. This system should work fine in any timeframe, especially with higher timeframes.
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