Local variables are specific to an individual macro. You should use a local variable when the value is only required in that individual macro. Local variables are accessed via the edit macro screen.
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Simplified:
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belongs to the macro it has been created into. It can only be used inside this macro. Its name must be unique inside the macro it belongs to.
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Advanced:
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Local variables are specific to a single macro. Use them only when the value is required within that macro. Local variables can be accessed through the edit macro screen.