Ask The Expert
Tips of the TradeIf you think the price of a stock you own might begin to decrease, you can attempt to protect profit or limit losses by placing a stop order.
If you're placing a buy stop order, your stop price should be higher than the prevailing market price. If you're placing a sell stop order, your stop price should be lower than the prevailing market price. Stop orders must be placed at least .10 below the current bid or above the current ask.
For complete instructions for placing a stop order, visit Placing Stop Orders in the Knowledge Center.
Get Technical with MACD
There are many technical indicators to choose from, and to a certain extent, most of them perform very similar functions. A technical indicator is a charting tool that is applied to a stock's price chart to help simplify or filter price action and to identify buy and sell signals.
Although some indicators will fade in popularity, there are a few that have been around since before personal computers and online charting. This article will introduce you to one of the indicators that has stood the test of time, the Moving Average Convergence Divergence (MACD).
The MACD indicator can be applied to a price chart in the ScottradeELITE trading tool. You'll find instructions for adding MACD and other technical indicators to your charts in the Adding Chart Studies section of the Knowledge Center. The indicator itself is derived from the relative positions of a series of moving averages. These relationships are then charted as the MACD line. A rising MACD line is considered bullish, and a falling MACD line is considered bearish.
The MACD indicator also includes what's known as a "signal line" that the MACD line will cross above or below. When traders are very bullish, the MACD line will tend to be above the signal line, and when they are bearish, the MACD line will tend to be below the signal line. When the line crosses above or below the signal line, a potential trading opportunity is created.
Two very popular trade signals that investors will look for on the MACD are signal line buy signals and bullish divergences. They are easy to identify and are relatively simple to use. Ultimately, you are responsible for making your own buy and sell signals, but a technical indicator like the MACD can be useful for identifying potential opportunities.
Signal Line Buy Signals
The MACD signal line can be used to time an entry into a stock. From a technical perspective, trading with the trend is a good idea (although it's important to remember that reality doesn't always perfectly match technical signals), so a potential buy opportunity would generally be on a stock that is already up-trending. You can see an example of signal line buy signals on the up-trending stock chart here.
As you can see, when the MACD line crosses above the signal line it signals to us that traders are bullish on the stock and may create an opportunity to buy the stock just as a potential uptrend is about to continue; one that we suspect may reach new short-term highs. Again, this is a general conclusion based on our technical analysis, and the market may or may not perform in the way we expect. Using the indicator like this helps substantiate our decisions to execute a trade because the signal is designed to indicate there is a higher likelihood (but never a guarantee) that the market will continue up in the near term.
Bullish Divergences
The MACD line will create peaks and valleys just like the price chart itself. These peaks and valleys usually coincide with highs and lows on the price chart. Sometimes, however, a series of two lows will be trending higher on the MACD indicator while the stock chart's lows are trending lower. You can see what this looks like in the chart below.
The situation shown in the chart above is a classic MACD bullish divergence because the indicator's valleys are becoming less bearish through August compared to the stock's valleys. This reveals some "hidden" bullishness in the stock that could result in a dramatic breakout to the upside. Unlike signal line buy signals, in this case we look for this signal when the stock has been trending flat. The chart above is an ideal example of this kind of pattern and the resulting bullish breakout that often occurs.
No technical indicator will give perfect signals all the time. They are helpful to identify potential opportunities, but you are responsible for making decisions that are right for your own risk tolerance. If you are new to technical analysis, starting with the MACD may be a great place to begin. It has stood the test of time, and there are many trading strategies using this indicator that have been very well documented.
John Jagerson contributes educational videos and articles about the stock, options and forex markets that can be seen daily at www.learningmarkets.com. This article was written exclusively for Scottrade.
The analytical tool described in this article is for information purposes only. Its use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision.
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