MACD stands for Moving Average Convergence Divergence. It is technical indicator that use to generate a buy and sell of stocks.
The normal and default setting for a MACD is (12, 26, 9). It means that it will subtract 26 days of exponential moving average or EMA to the 12 days of EMA. It will also plot a 9 day moving average called the signal line. MACD chart would look like this.
Using MACD properly, you can pinpoint when to enter and exit into stocks. It will give you the buy and sell signal
How to do that? Here it is.
Basically, buy and sell signals are generated by the two lines of MACD: the MACD line (blue line) and signal line (red line). Using the above chart, let’s identify the buy and sell signal.
As you can see on the chart above, it is a buy signal or bullish when the MACD line cross over and went above the signal line. Looking at the black arrow up, MACD tells you to buy that stocks.
On the other side, it is sell signal or bearish when the MACD line crossover and went below the signal line. If you will look at the black arrow down, it MACD will tell you to sell that stocks.
TIP#1: If MACD line and signal line just hug each other, it does not mean buy or sell signal. You have to wait for the crossover and for the separation for the good signal.
TIP#2: Look at the good crossover and separation of two lines, especially if two lines are far apart from each other.
Now, let’s put this in real world. There are some difference from real world compare to the illustration. It’s not always perfect as seen on illustration compare to actual stocks.
Take a look at below example:
That is weekly chart of EEI Corporation.
If you will look at the arrow up on the left side, MACD crossover and MACD line went above its signal line. Price went up for a months.
From the price of around 4.00, it goes up to 15.00. That’s 275% price increase for the span of 1 year and half.
And on the arrow at the right side, they crossover again and MACD line went below its signal line. Price continue to drop.
Let’s take another example. This time, it’s MEG.
If you will look at all the arrows, it’s almost the same as our first example. On the left most arrow, MACD line went above the signal line, the price continue to go up from around 1.700 to 3.600. That’s 112% price increase for the span of 1 year and half
On the other side, when MACD line went below its signal line, price continue to drop.
Hope this help you on how you can choose your next winning stocks. Please don’t leave without any comment. It is very much appreciated.
To your next winning stocks,
PS – Please feel free to share to others.