ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Investing in Stocks, Bonds, Real Estate, More

How to Buy Shares – Moving Average Convergence Divergence – MACD

Updated on March 27, 2011

Starting Buying Shares

If you are starting in buying shares then there are a few technical analysis indicators that you will need to learn so that you can do it successfully. It is true you can start by looking for great IPOs and wait for the price of the IPO to shoot to the roof. But then, the share or the stock or your investment will start dropping in price to below where you bought it. This will happen when you are still hoping that it will soon go back to the roof again. To prevent this from happening to you, you will need a few technical indicators to warn you that your shares’ prices have reached the top and are now beginning to drop in price. One such indicator is the Moving Average Convergence Divergence – MACD.

The Moving Average Convergence Divergence – MACD was created by Gerald Appel in the 1960s. MACD shows the difference between a fast and slow exponential moving average (EMA) of closing prices - but you can still just use plain moving averages.

Moving Average Convergence Divergence – MACD

Define:

1. The Slow moving average = 26 days exponential moving average

2. Fast moving average = 12 days exponential moving average

3. Signal line = 9 day exponential moving average of the difference between fast moving average and slow moving average.

4. You can change the periods of your moving averages depending on your discretion.

Trades:

1. Sell or Short the stock when MACD crosses to below the signal line.

2. Buy or Go long the stock when MACD crosses to above the signal line.

Important:

1. The maximum divergence is proportionate to the volatility of the stock. Study the past history of the stock’s maximum divergence to determine reasonable large swings (crests and troughs). Trade only if the divergence has formed a reasonable trough or crest. Values of between -2.5 and 2.5 may only represent a ranging market and you are likely to be whipsawed.

2. Define your trend. If your trend is upward, trade only long stock trades, and if your trend is downward, trade short stock trades.

3. Always keep an automatic stop loss order in place.

4. If your trend changes direction, exit immediately. Do not wait an extra one more day to see if things will come back to what you want - this is where most problems of many traders start.

Formulae:

1. MACD = EMA 12 days prices – EMA 26 days prices

2. Signal = EMA 9 days of MACD values

MACD shows the difference between a fast and slow exponential moving average (EMA) of closing prices. Image Credit: Wikipedia.
MACD shows the difference between a fast and slow exponential moving average (EMA) of closing prices. Image Credit: Wikipedia.

MACD is a Lagging Indicator

Bear in mind that MACD is a lagging indicator and your entry or exit point may not be lowest or the highest price for your time frame. Many traders criticize MACD as an indicator that fails to respond well to ranging market conditions. MACD is prone to whipsaw and it is very possible that beginner traders may suffer substantial losses if they are not careful. To avoid such losses a trader should only trade in the direction of his defined trend and should have automatic stop loss orders with his stock broker.

If you have liked this article, and you would want this page to keep up and improved, you can help by purchasing some great items from Amazon by following Amazon links and widgets on this page. A free way to help would be to link back to this webpage from your web page, blog, or discussion forums.

The Author’s page is designed to help beginners and average readers make some money as an extra income to supplement what they may be earning elsewhere - details of which you can find in My Page, if you will.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)