Trade Examples using the MACD

I use MACD to find trends that might come to an end. That is, I look for diversions, both bullish and bearish. I don’t look for crossovers much, nor do I use the histogram. The settings I use are the traditional 12, 26 and 9. I haven’t actually experienced in changing them since I think they work just fine for my trading style.

Of course, I don’t make trade decisions based on the MACD. It is only an indicator that a change in trend is possible and that the stock in question is worth putting on the watchlist. And that’s an important point to make; just because there are signs a trend is about to end doesn't mean that it will turn on a penny and trend in the other direction.

So the method of operation is:

1. Look for the divergence in the MACD v Price.

2. Look for an entry signal on the Price chart.

Here are a few examples of trades I have taken after identifying a divergence. Some worked out better than others. Some I sold too soon. Some I should have added to as the trade went along.

Citigroup

Citigroup MACD trade

In early September 2023, I noticed that there was a small divergence starting to build in CITI. Shortly after, there was surge in price and a possible entry point (the orange arrow), an entry point I didn’t take. The reason being that I didn’t think that the divergence had been going on for lone enough. If I had had a shorter time frame in mind for my trade (1-3 days) this could have been a good entry.

As it turned out, it was the right decision, and the stock continued to fall. The divergence continued, however, and when we had some gap ups and a crossover of the signal and MACD lines, I took the trade (the first green arrow). I got in at the end of the day and at the very top of the day.

My stop was just below the low of the day of entry, at just a potential loss of 3%. That is actually a little tight but if the price starts to move into the gap, it usually goes all the way. But I had made the right call and the stock gapped up again the next day and I immediately moved my stop to break even (all the little red lines are my stop levels).

After a few days of sideway motion it gapped up again, moved into a new consolidation, and when it broke out of that one, I added to the position. As CITI continued to rise, I kept moving my stop up and was almost stopped out twice, the price was just a few cents from my stop level.

Eventually, I was stopped out at $25.89. In the short term that was a good stop out but in the longer term not so good as price continued to rise. But overall, a very well executed trade. In hindsight, I could have added to the position several times, but everything is easy with hindsight.

3M

3M MACD  trade

Divergence in October and when it broke the green resistance line I took the trade. This time I put my stop at the EMA20 which held until January, and I was stopped out just in time before the gap down. I was almost stopped out earlier in December as the price came down to EMA20.

Using a moving average like this take out a lot of the “should I or shouldn’t I move the stop” type of thinking. This is not an article about stops though, but it sure makes life simpler than raising stops with regards to price levels or patterns.

Autodesk

Autodesk MACD trade

Divergence from late April and a gap up and huge up day, right up to resistance level. Then it was fairly volatile for a while before break out of resistance and I took the trade. Since it was so volatile I decided not to risk very much so I put my stop just below the breakout level.

Then it move very strongly and I moved my stop to the second red line. Then another strong move and here it looked really good and I was hoping for a test of $265-$270. But that never happened, instead it fell sharply and took me out just under $240.

VF Corp

VF Corp MACD trade

A very “sharp” or steep divergence in April – June and when the price gapped up above the falling trendline I went long with a stop just inside the falling trendline. It consolidated a few days then moved up again and I raised my stop.

Then I was take out on an intraday dip only to see the stock move higher again. But that’s how it is sometimes; or, a lot of times. After I was out of the trade the stock has been both lower and higher, breaking the EMA’s so I would have been out even if I had used other stop strategies.

The MACD doesn’t catch everything though. Here are some examples of recent trend reversals that it missed, and as a consequence, so did I. I didn’t take any of these potential trades.

Uber

Uber no signal in MACD

Uber nearly doubled from November 2023 to February 2024. There was no divergence in the MACD. A great entry would have been when price crossed the green falling trendline.

Super Micro Computer

Super Micro Computer no signal in the MACD

From January 2024 to early March, SMCI rose over 300%. Unfortunately, there was no divergence in the MACD, so this is another one that I missed out on.

Final Thoughts

I think the MACD can give great signals of changes in major trends. When a stock goes from one clear trend to another, it usually gives you a good signal. But it does miss as well as we have seen, and the really good signals are few and far between.

My feeling is that the bull signals are better than the bear signals. But this is just a hunch, I cannot back this up with data.

When a stock is moving sideways the MACD will also move sideways and crisscross around the zero line. If you traded crossovers of either the MACD and Signal lines or the zero line, you would quickly be whipped out in a market like this.

I know I rant about this all the time, but you must make entry and exit decisions based on price and volume, not on an indicator. Use indicators to find possible trades and use price to take the trades.

If you want to know more about the MACD indicator, I have and article om Medium which you can find here.