An example of the MACD
Let’s say you’re tracking the S&P 500, and you want to trade with a popular index fund like SPDR S&P 500 ETF. Say its 26-day exponential moving average is 400 and the 12-day exponential moving average is 395; you would have a MACD of -5.
A few days later, the 12-day EMA is higher than the 26-day one, giving you a MACD of 3. You would want to buy the stock when the MACD turned positive, which signals an entry point as the stock (or index fund, in this case) is moving higher. If the MACD stretched to 10, however, some traders might interpret that as a sign that the stock was oversold.
Technical indicators like the MACD can give traders further insight into the short-term direction of the market. Long-term investors trying to ride the next bull market are better off investing in fundamentally strong businesses, but understanding technical indicators like the MACD can help guide your decision-making and understand why the market moves the way it does.
You don’t have to trade with the MACD to use it. Following it for a few weeks might help you pick up on some other short-term trading insights.