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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

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Based on this information, Tesla stock currently is a short-term “strong” buy. If Tesla’s MACD line drops below its signal line while both lines are above the zero line, the shares would be a “moderate” buy.

A few years ago, I spoke with MACD’s creator, Gerald Appel. He told me that he created MACD in the late 1970s by entering numbers into a punch machine and a spreadsheet. After the personal computer was invented, he was able to automate the process. 

Appel expressed surprise that MACD became so popular. “It works because it’s adaptable to any time frame,” he said. “You can get a good reading of the major trend of the market by using MACD patterns that are based on monthly data. You can also use it on a five-minute chart.” 

MACD gives the most precise signals at market bottoms. Said Appel: “It’s more accurate at market low points than high points because of the way the market behaves. Market bottoms tend to be very sharp and pronounced, while tops tend to be broad and slow. It’s also possible for the market averages to keep drifting upwards while more and more stocks are falling.” 

Appel cautioned that you must confirm MACD signals against other indicators. “No indicator is infallible,” he said. “You might get a market rise and MACD turns down. Perhaps you think this is a sell signal. Well, it might not be.” 

Appel added that he likes to work with different MACD time frames simultaneously. For example, if the short-term MACD turns up along with the intermediate MACD, he’s more confident that the signal is valid. 

The MACD-Histogram

One of the most powerful (but often ignored) additions to the MACD is the MACD-Histogram. Developed by Thomas Aspray in 1986, this oscillator is used to gauge momentum. It is a separate program that should be available on your charting package. Traders who use this feature typically view both MACD and the histogram on a stock chart simultaneously.

The histogram is a series of bar graphs at the bottom of the stock screen. If the bars move above the zero line, it means the underlying stock (or index) is gaining strength, i.e., momentum. If the bars move below the zero line, the stock or index is losing strength.  

Many beginning traders don’t realize that momentum always changes before price does. That is what makes MACD and the MACD-Histogram so valuable. Both indicators detect when momentum is weakening. It could also be a signal to become bullish if the histogram bars move above the zero line. 

Histogram signals 

  1. If the MACD-Histogram bar changes to a lighter color, it means that momentum is diminishing. It is not a sell signal; it simply means that enthusiasm for that particular stock is waning.

  1. As mentioned earlier, if the histogram bar rises above the zero line, that is a buy signal. An uptrend may be developing. If the histogram bar drops below the zero line, that is a sell signal. A downtrend may be developing. 

Red flags

If you see the index prices as well as stock prices move higher, but MACD turns lower, that is a red flag. In addition, if you see the MACD-Histogram changing colors and the bars getting shorter, that confirms momentum is weakening (but confirm this against RSI or stochastics). 

If you have never used MACD or MACD-Histogram, give it a try. Use these measures for any stock that has hit bottom and is on its way higher. They’ll help confirm whether the stock has legs or is a just giving traders a head fake. 

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.”

More: These are the most important things to check on a stock’s quote page before deciding whether to buy or sell

Also read:   Investors love to boast about their great stock picks, but beware of those who use fancy math to calculate their gains

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