written by reader Technical trading using MACD

By runcer, March 31, 2016

I have traded for a few years now but mostly by gut feeling and shooting from the hip. I am trying to be more informed on when to get into and out of a position, possibly by looking at momentum indicators such as MACD. My question is this, when looking at the daily chart the momentum is down while the weekly chart says it is up, which one do i believe? (TSX:POT as an example). I am not a day trader, I like to buy and hold and possibly get into things with a reliable dividend. Any guidance on this much appreciated.

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Travis Johnson, Stock Gumshoe
March 31, 2016 5:13 pm

If you don’t want to trade frequently or get in and out based on changes in momentum or any of the technical indicators, then there’s no real reason to focus on those technical indicators when you’re buying — you might just have a different mindset, and that means that examining the fundamentals is more likely to be useful for you: Studying the potash market, trying to understand the potential future scenarios for POT and the sustainability of their dividend, and deciding whether you are comfortable with the valuation that the market is assigning to Potash at today’s price, or at some other price.

I use technical indicators very rarely, though they can be a nice way to bolster your confidence if you’re not sure you trust your opinion about the fundamentals — all the charts are telling you is what trends are being set up by the market’s hive mind, so they have very little relevance to what a company might become in 20 years but they may well have a good role to play in examining the momentum or trends in the market or in a particular stock.

Your broker probably has some basic videos or tutorials about technical analysis that you can use to get more familiar with the concepts (Fidelity has one here that’s OK, for example: https://www.fidelity.com/learning-center/trading-investing/technical-analysis/basics-of-technical-analysis-video), but it’s important to remember that trading based on the chart indicators can work pretty well IF you do it consistently using the same effective (preferably basic) strategy… working well means it might work a bit more than 50% of the time, so you have to have some comfort level with letting the averages play out, and, if you really do want to follow the technicals, make sure you keep your trade discipline when it comes to selling — selling is a lot harder than buying.

Hopefully other folks have helpful TA tutorials or books they might have used, there’s definitely no point in trading using indicators that you don’t really understand — that won’t give you any confidence at all, and chances are that if you don’t understand it pretty well, whether it’s a fundamental strategy or a technical analysis indicator, you’ll drop whatever it might be when it fails to work once.

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Travis Johnson, Stock Gumshoe
March 31, 2016 5:20 pm

Sorry, I went off a bit long-winded there for you — you were asking about daily or weekly momentum and I got full of blather. I think the key is being consistent and using the same indicators and time periods so you develop a strategy and technique that you’re comfortable with — there’s an interesting article about one method here, but mostly that style of trading doesn’t appeal to me so I don’t look into it very closely.

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