Knowing how to buy stocks at the optimal price is a key component of profitable investing and the use of the MACD indicator can help identify the right price to enter a new investment.
After a stock has been found that is in an established uptrend and is outperforming the market as a whole, use of the MACD can quickly establish when to enter a trade.
Recall from this page on how to buy stocks is that one of the key patterns to watch for is a stock that is making higher highs and higher lows.
Once a stock is in an uptrend it needs to be outperforming the market or at a minimum performing with the market as long as the market as a whole is in an uptrend. However, you’ll have more investing success if you focus only on stocks that are outperforming the market.
Take a look at the chart on the right. This is the pattern of a stock that is making higher highs and higher lows. Our strategy is toplace our buy orders at the right time on a pullback and enter stop orders slightly below the prior pullback price.
The MACD indicator can help us identify these price points and can in turn improve our investing profitability.
This article will explore several aspects of the MACD that we can use to our investing advantage. As explained at the article found here, signal line and zero line crossovers of the MACD are not only the most frequent signals but they are also extremely useful for profitable investing.
How to buy stocks using the MACD and Bank of America (stock symbol BAC).
The accompanying chart shows the performance of BAC during 2013 and has a been annotated appropriately so we can examine the optimal buy points during the year.
Although there are approximately 8 bullish crossovers of the MACD during the year there are only 3 or 4 optimal buying opportunities.
Further, although BAC appears to be in an overall uptrend throughout the year there are only two periods when BAC is outperforming the market.
Recall from this article, how to buy stocks, that we are only interested in investing in stocks that are outperforming the market. So even though the MACD might be indicating buy, we only pay attention to those buy signals – assuming they are correct in the first place – that fall into periods of market out performance.
All told there are only 3 MACD buy signals during the year that present optimal buy points and these are shown as points A, B, & D on the chart. Learning how to assess these signals will help you learn how to buy stocks properly when examining other stocks on your watch list.
Let’s examine these buy points one at a time. Point C appears to be a valid buy point for a number of reasons but a solid understanding of how to buy stocks properly would have kept you from buying at that time.
Buy point A in early May
BAC had only been performing with the market until the end of April. So although BAC might have been on your watch list from an earlier time, BAC would not have been a buy candidate until the stock started outperforming the market.
In early May BAC started to outperform the market just as the time that the MACD indicator accomplished both a bullish zero line cross and a bullish signal line cross. Either of those signals alone might be an indication to buy a stock, but both occurring near each other at the same time that a stock outperforms the market is a clear buy indication.
Investors would have been able to purchase BAC as it moved above the down trend line on increasing volume (volume not shown on this chart).
This buy point might have been considered a little risky for two reasons. First, the MACD has already moved higher than we would like as an entry point. Second, the purchase price is a further away from the bottom of the uptrend line at 11.75 than we would like to see.
The first price to place our stop-loss/profit-keeper stop would have been at a little under $13.00 (read more on how to sell stocks properly). Indeed, BAC fell rather sharply back to the trend line which would have stopped out our first position at right around $13 for a small profit.
Not very good but not a loss either. But you never know if stocks are going to reverse into a downward trend until they show you. So profitable investing always looks to gain an edge – and profits – on stock price moves that appear to be optimal investments, even though they may not work out completely as we envision.
Buy point B in early July
In early May, BAC is still outperforming the market and so remains on our watch list for optimal buy points. Buy point B is interesting because the prior low had already reversed sharply from a return to the lower trend line. It had found and established a fairly strong support level between $12.25 and $12.50.
A movement above $13 just as the MACD made a combination zero line and signal line crossover was the signal traders needed to buy back into BAC. This proved to be an excellent purchase price as the stock moved sharply from $13 to $15.
The first opportunity to establish a profit-keeper stop on a pullback was at $14.50. In early August BAC failed to make a new high which is a key indicator of a valid sell point. In fact, BAC price action in August would have stopped you out right at $14.50 for a solid $1.50 gain (approximately 11.5%) in just a few weeks.
That would have been a good move because in mid-Sept BAC started under performing the market and so would not have passed our initial criteria anyway. For now, BAC was off our watch list.
Why point C in October is not a valid buy signal
Point C might have motivated some stock traders to take a new position in BAC. The price is near the lower trend line which is good. The MACD is making a zero-line and signal line crossover which is also good.
What’s missing at this time is the fact that BAC is under performing the market, otherwise this trade might have worked to your advantage. However, after a move up from here the price dropped back to the purchase price level and the lower trend line.
An investment in stocks that are under performing the market represent higher risk than you should take.
As this discussion shows, only consider trades in stocks that are out performing the market. This approach will keep the investing wind at your back and allow you to step aside and avoid more risky investments.
Buy point D in early and mid November
Early November is when all the buying indicators for BAC really appeared together.
First, BAC started outperforming the market again and so became a solid buy candidate. After we have selected a stock in a solid uptrend that is outperforming the market it’s time to monitor for an entry point.
Second, the twin signal of a bullish zero line crossover and a bullish signal line crossover provided the indication that BAC was a buy candidate again.
Third, also consider that the price of BAC was resting on the lower trend line which we have discussed is a much more desirable buy point.
The combination of all these signals indicated that BAC should have been purchased at around $14. A second buy opportunity occurred about a week later when BAC broke out of the base that had been forming since July. This buy point occurred at about $14.75.
Since then BAC has moved up to a high of $16 and appears to be undergoing a controlled pullback to the support line at $15. It remains to be seen what happens in the future but if the support at $15 holds BAC might provide more solid buy points as the uptrend continues.