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Indicators 101

Moving Average

In its simplest form, the moving average is just the average of historical prices, indicating potential momentum. This illustrates the historical trend by “smoothing” volatility. The trader can choose a time frame according to his or her preference. The longer the time frame, the smoother and less sensitive to price change the moving average becomes. And the shorter the time frame the more sensitive to price change and therefore subject to whipsaws.

Moving Average Convergence/Divergence (MACD)

This is a popular oscillator. It is created by defining two weighted moving averages, a 12 day and 26 day exponential moving average, and deriving the difference between the two. This difference forms a MACD line—a horizontal trigger line. When two moving averages cross below the trigger line, which is usually a nine-day EMA, it is considered a bearish signal. When the moving averages cross above the line, it is considered bullish.


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