Stock market experts often use many tools for decision making. They use fundamental analysis and technical indications. Ordinary investors who are not experts in the stock market can use very simple technical analysis tools to improve the performance of their investments.
One of the simplest tools is the use of the moving average (MA), which generates a smoother chart of the underlined stock or index. The average is calculated for redefined days or weeks ago, depending on the frequent transactions made by the investor. A 12-week moving average (MA) can provide a sense of the market’s short-term trend. It changes slowly than the stock/index itself. A 26-week moving average provides a longer-term trend for the market. It is much slower than the stock chart itself.
In a positive, “bull” market, the 12-week MA is higher than the 26-week MA. The difference between the 12-week MA and the 26-week MA is positive, and its value can tell you something about the strength of the trend in the market. Once this difference is equal to zero and then turns negative, this is somehow an indication of a negative trend in the market, i.e. the market turns negative. This is considered a “bearing” market. The difference between the short-term MA and the long-term MA is actually the MACD (Moving Average Convergence Divergence… Ignore the big words…).
You just have to remember that:
MACD = Short MA – Long MA.
The MACD, as explained, oscillates around the zero value. When it is positive it indicates a bull market and when it is negative it indicates a bear market. The MACD indicator is called by experience a momentum oscillator, and they have many of them for their complicated analysis. For non-experts, the MACD is a very simple tool. It provides a very good trend indication for the market, on a weekly time scale.
Now, you don’t need to calculate this on your own. Almost all stock market related websites and apps offer this basic tool. In such standard tools, the short MA is usually 12 weeks and the long MA is usually 26 weeks. But this is up to the user and can be changed very easily to suit the needs of the user. So, as an inexperienced investor, who simply wants to maintain the value of his money and make some positive gains, I not only look at the fundamental characteristics of the market, I also use the simple MACD tool.
Being an armor trader, I generally work with weekly charts. This also needs weekly monitoring. Consequently, the frequency of the transaction is monthly, that is, it is necessary to carry out a buy/sell transaction once every several weeks or months, if it happens at all. Having said the above, you also have to pay attention to the drawbacks of the MACD.
Being a tool that is based on MA, by its nature it is usually in a phase of delay with respect to the market. This means that it can indicate any significant trend change only after the trend has already changed. So it is useful in a market that does have a clear uptrend or downtrend. Once the market is oscillating without a clear trend, the MACD indication has less importance. Still, the MACD is a very basic useful tool that can be used by inexperienced people to take advantage of their performance in the stock market.