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Sept. 18, 2021, 10:36 a.m. EDT

Savvy stock traders use these 2 insider tips to know when to buy and sell

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By Michael Sincere

For many stock traders, four letters can spell the difference between a winning and losing position. MACD (moving average convergence divergence) ranks among the key stock market indicators (along with moving averages and RSI) that traders use consistently in their analysis.

Let’s discuss a number of creative ways to use this powerful and versatile gauge. 

MACD, introduced in the late 1970s, is a trend-following momentum indicator.  It helps to determine when a trend, and its associated momentum (i.e., directional speed and duration) has ended or begun, or might reverse direction.

Be aware that MACD is a “lagging” or “backward-looking” indicator, which means its signals are delayed, but don’t let that deter you. When MACD yields a signal, it is often significant, especially if used on a weekly chart (versus the daily chart favored by short-term traders). In fact, the longer the MACD time frame, the more valid the results, which is one reason longer-term traders like myself prefer to use a weekly chart. 

When you view MACD on a chart, you see two lines. The black line is referred to as the “MACD line.” The gray (or red) line is referred to as the “signal line.” Remember: the MACD line is the leader line, while the signal line is the laggard line.

In addition, a horizontal line runs across the chart called the “zero line” (0 line).  The main function of the zero line is to alert you to the primary trend of the underlying price action. 

Four simple trading signals

At its most basic level, MACD generates four signals: 

Buy: When the MACD line crosses above the zero line, it’s bullish. 

Buy: When the MACD line crosses above the nine-day signal line, it’s bullish.  

Sell: When the MACD line crosses below the zero line, it’s bearish.  

Sell: When the MACD line crosses below the nine-day signal line, it’s bearish. 

Note: When both the MACD line and nine-day signal line move in the same direction (uptrend or downtrend), that is a stronger, more significant signal. 

Keep in mind that just because MACD generates a buy or sell signal does not mean it is an actionable trade. Like that of any indicator, there are false signals. In addition, it’s essential that you confirm with other indicators before betting real money on a trade. Think of these MACD buy and sell signals as guidelines, not rules. 

Another limitation of MACD is that it does not work as well at stock market tops or when market volatility is low. Therefore, if you use MACD on the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.17% or the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.84% in this current market, the signal is not as useful. That is why you should use MACD on individual stocks until volatility returns to the major market indexes. 

What MACD says about Tesla now

For example, the weekly stock chart of Tesla /zigman2/quotes/203558040/composite TSLA -6.42% shows its MACD is above the zero line, and the MACD line is above the signal line. Tesla is also above its moving averages. 

US : Dow Jones Global
-59.71 -0.17%
Volume: 444.85M
Dec. 3, 2021 5:35p
-38.67 -0.84%
Volume: 2.71B
Dec. 3, 2021 5:35p
US : U.S.: Nasdaq
$ 1,014.97
-69.63 -6.42%
Volume: 30.77M
Dec. 3, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$1089.23 billion
Rev. per Employee
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