In this post, we will only refer to the price action with the default settings (12 and 26 ).
The is simply built on two major line components, the 1) line, and the 2) Signal line.
The line and signal line is shown in the example below. The line is defined with two lines where one reacts faster to price changes.
The Histogram is the difference between the line and the signal line, also shown in the example below. The bigger the gap between the lines, then the higher the bars that the histogram will show within the indicator.
The in general is a that shows the relationship between the two moving averages as explained above. The line is calculated by taking the difference between the longer and short term period . Exponential averages are used because they respond quicker to price change and is weighted on recent price action.
How It Works
Again, if you open up your indicator from the tool list, you do not need to change the default settings, as they default settings for the is already set at 12 and 26, respectively as the main . As the two moving averages move away from each other, the line will rise or fall as shown in the diagram above.
When the two moving averages cross, there is a corresponding cross of the zero level by the line.
When the signal line and line averages cross, there is a corresponding cross of the zero level by the histogram.
The most important way to interpret it is understanding the interaction between the two lines as well as their positions relative to the zero line. When the is above the zero line, it indicates that the momentum is . When the line is BELOW the zero line, the momentum is then considered to be .
In summary, the is used in one of three ways:
1) Crossovers - this is generated when the lines cross below the signal line. These either create a buy or sell signal when it crosses to the upside/downside. In addition, the locations of the crossovers in relation to the zero line are helpful for determining the buy or sell signals. signals are more significant when the crossover takes place below the zero line. The CONFIRMATION takes place when both lines cross ABOVE the zero line. Crossovers work best when you are in a TRENDING market. You can still have crossovers within a market, often creating false signals for new traders.
2) Overbought/Oversold conditions
The best time frame for the does not exist. This would be completely up to your personal preference; however, daily signals (1D timeframe) are more significant than shorter timeframes because they carry more weight. A good tip is to track the behavior of the on a , and confirm the trade with the .