Second one indicator that we want to talk about
Is called the MACD.
A MACD is
Also in the similar category as moving averages, which means that they work best
in trending
environments
Which means that in sideways
Environments it's better to not even
It's still best to look at price and volume instead
as opposed to
Looking at your indicators particularly moving averages and MACD.
So MACD is best used in trending
Environments. It's a lagging indicator. It's best used in trending environments but an effective
Momentum tool that uses a crossover system. Now,
MACD looks complicated, but it's very simple. There are three components.
The first two are the red line and the blue line that you see go up and go down here.
The faster line is called the MACD line, which is the line on top and
It's the first one to cross below the slower line and the blue line is called the signal line.
Now, what that simply means is that...
and by the way,
Your MACD is a derivative of your moving average.
Which means that it's a derivative of price. If you want to know the formula as to how MACD is computed,
It's simply computed using price.
Which is precisely why it always falls behind price
Behind your decision-making hierarchy because you want to make your decisions
Based on the source as much as possible.
So your MACD and signal line work simply, if they cross up then it's a buy. If they cross down then it's a sell
If you see here
Once price has cross up meaning your red line crosses above your blue line. Then you have positive momentum.
You have positive momentum in your stock as long as your red line is above the blue line.
That momentum is essentially the distance between the red line and the blue line and that is measured in this horizontal
Bars over here. Obviously, the higher the bar, the higher the momentum. You guys see that?
Then the last one is the zero line. You see the zero number over here? The zero line is your horizontal
line over here.
It's the horizontal line where the vertical bars emanate from both
going above and going below.
If you see vertical bars going above, then that is your positive momentum.
If your vertical bar is below the zero line, then that is obviously negative momentum.
Here you can see that positive momentum is decreasing.
Here you can see negative momentum is decreasing as well.
So how that works, if we look at an example, is
You want to be able to combine both signals, which means that you want to be able to buy
when both lines
when the red line crosses above the blue line
while both of them are above
above the zero line you guys follow
So you have here a cross up
Which gives you the first of two buy signals and then as prices go above the zero line
then you get both buying signals already and that means that at this level over here,
It gives you the buy signal.
Now here's the question that's mostly asked,
Why do you have to wait for both lines to go above the zero line?
Why can't we just buy over here when the red line crosses above the blue line?
Huwag mo nang hintayin yung akyat doon sa zero line or sa horizontal line. Edi kung ganon, nakabili ka dito.
When both of your lines are above the zero line, it means
prices are in an uptrend.
If both of your lines blue and red lines are below the zero line, it means you're in a downtrend,
Which means that if you're gonna use the signal to enter
this particular signal
Obviously in hindsight, kita mo umakyat na so tingin mo gusto mo bumili di ba? Howevver,
There are a lot of times fifty percent of the time when you enter here
It could simply be a rally inside a bigger downtrend
Meaning a short term up move inside a bigger down move
Which is precisely why you want to be able to wait for the cross up and both lines
Going above the zero line to make sure or to at least have a higher probability
That you're buying a buying signal
inside an
Uptrending environment.
And
MACD
MACD is typically a lagging indicator, which means that mas sigurista siya na indicator.
It doesn't give you an early signal, but it gives you a signal when...
I don't want to say hundred percent, but I'd say 80-85 percent prices are already in a predetermined uptrend.
So when you buy you need to wait for both signals
But when you sell you can simply use the cross down in your MACD
To be able to sell using the short term.
when you have a cross down in the MACD, it signifies that you are now entering a period of
duration.
Especially when you have a... Let's say for example, you have a cross down over here
But it crosses down but it stays above the zero line. You guys see that? It doesn't go below the zero line.
It means that you have some sort of a duration
Happening inside an uptrend which is precisely what we saw here.
You have magnitude, duration. Cross up again, magnitude and you have some sort of duration, magnitude.
Is that clear?
Okay, so let me just show you how to use the MACD.
So you click on MACD. Click on create' and you'll see your MACD over here.
You guys see that? So in the case of DNL,
prices crossed up
But are both lines above the zero line?
No, which means that it's not a buy signal
Altogether. But even if you take a look at the context, what did we say MACD is best used in?
Trending environments.
This case you're not inside an uptrend you're in a generally sideways to downward movement. In this particular case
I'd still prefer to use my support-resistance lines and
to be able to use my bounce of support and break out of resistance as the
basis for my decisions as opposed to using indicators in
Market environments where prices are generally in a sideways or in a corrective fashion.
