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Computerized Investing > Second Quarter 2012

Moving Average Convergence-Divergence (MACD)

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by CI Staff

Moving averages are some of most simple technical indicators investors use. While their simplicity makes them very popular, they do suffer from one drawback—they are trend-following indicators that work best during strong trending periods. During sideways or choppy markets, moving averages tend to generate false signals and are prone to “whipsaws,” where buy or sell signals are reversed in a short time.

To overcome this, technicians use an indicator called the oscillator, which is more sensitive, and thus more responsive, to this kind of market activity. Oscillators may be used to determine overbought or oversold conditions as well as whether there is a divergence between price and the indicator.

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