MACD Indicator for Beginners: How to Spot Winning Stocks

What Is MACD and Why Does It Matter?

The MACD Indicator (Moving Average Convergence Divergence Indicator) is one of the most popular tools in technical analysis, used to track momentum shifts and potential trend reversals in the stock market. While many associate MACD with short-term trading, it can also be valuable for long-term, buy-and-hold investors looking for optimal entry points in fundamentally strong companies.

Instead of relying solely on price action or short-term trends, buy-and-hold investors can use MACD crossovers to confirm when a stock’s momentum is turning positive—helping them buy high-quality stocks before a long-term upward trend begins. However, it’s crucial to combine MACD with fundamental analysis, ensuring that a stock is not just gaining momentum but also has strong financials and growth potential.

In this guide, we’ll break down how MACD works, how long-term investors can use it effectively, and how to avoid common mistakes when interpreting MACD signals.

Learn More About the MACD Indicator

The MACD (Moving Average Convergence Divergence) indicator is a momentum-based technical indicator that helps investors determine:

• Trend direction – Is a stock gaining or losing momentum?
• Trend strength – How strong is the current uptrend or downtrend?
• Potential reversals – Is a shift from a downtrend to an uptrend likely?

How Is MACD Calculated?

MACD consists of three main components:

1. MACD Line – The difference between the 12-day EMA (Exponential Moving Average) and the 26-day EMA.
2. Signal Line – A 9-day EMA of the MACD line, which helps identify buy or sell signals.
3. MACD Histogram – The graphical representation of the difference between the MACD Line and Signal Line.

The formula for MACD:

$$\text{MACD Line} = 12\text{-day EMA} – 26\text{-day EMA}$$

MACD Line=12-day EMA−26-day EMA

When the MACD line crosses above the Signal Line, it suggests bullish momentum—a potential buying opportunity. When it crosses below, it indicates bearish momentum—a potential warning to be cautious.

For a deeper dive into how MACD works and its formula, check out this detailed explanation from Investopedia.

How Buy-and-Hold Investors Can Use MACD Indicator for Long-Term Investing

1. Use MACD on Weekly or Monthly Charts for Long-Term Signals

Short-term traders often use daily MACD signals, but these can generate too many false signals for long-term investors. Instead, use weekly or monthly MACD crossovers, which are more reliable for spotting sustainable trends.

🔹 Example: If you’re considering Microsoft (MSFT) for a long-term buy, check the monthly MACD. If a bullish MACD crossover appears on the monthly chart, it’s a stronger signal that the stock is shifting into a long-term uptrend.

You can check MACD crossovers for your favorite stocks using Yahoo Finance’s free charting tool.

2. Combine MACD With Fundamental Analysis

A bullish MACD crossover alone is not enough to justify buying a stock. It should be used alongside fundamental analysis to ensure the company is actually worth owning.

✅ Use MACD to confirm buy signals on undervalued stocks – If a stock has a strong balance sheet, increasing earnings, and a reasonable valuation, a MACD crossover could confirm the right time to buy.

📌 Read More: Determining the Intrinsic Value of a Stock: A Guide for Investors

🔹 Example: Imagine Apple (AAPL) is trading at a low P/E ratio, and its revenue and earnings are growing. If a bullish MACD crossover appears on the weekly chart, this could confirm that investor sentiment is shifting positive, making it a strong buy candidate.

3. Look for MACD Divergence to Spot Undervalued Stocks

A bullish MACD divergence occurs when the stock price is making lower lows, but the MACD is making higher lows. This often signals that downward momentum is weakening, even if the stock price is still declining.

🔹 Example: If Amazon (AMZN) is declining, but its MACD shows higher lows, it may indicate that sellers are losing strength—suggesting a reversal is coming.

📌 Read More: How to Spot Undervalued Stocks Like Warren Buffett

Common Mistakes to Avoid When Using MACD Indicator

❌ 1. Relying on MACD Alone Without Fundamentals

• A bullish crossover does not mean a stock is a good investment. Always check financials, industry trends, and competitive advantages.

❌ 2. Ignoring False Signals on Daily Charts

• Daily MACD signals are unreliable for long-term investors. Stick to weekly or monthly charts for stronger confirmation.

❌ 3. Buying at Overvalued Prices

• Even if MACD gives a buy signal, don’t overpay for a stock. Always ensure its valuation is reasonable before buying.

📌 Read More: The Buy-and-Hold Investment Strategy: A Path to Long-Term Wealth

Actionable Takeaways: How to Use MACD Indicator as a Long-Term Investor

✅ Use weekly or monthly MACD crossovers to confirm strong buy signals.
✅ Combine MACD with fundamental analysis—look for strong earnings, a solid balance sheet, and a reasonable valuation.
✅ Look for MACD divergence to identify stocks that may be undervalued and about to reverse upward.
✅ Avoid false signals by not relying on daily MACD crossovers for long-term investments.
✅ Have an investment checklist to ensure you don’t buy based on MACD alone.

📌 Read More: Why You Should Consider Creating a Personal Investment Checklist

Conclusion: Is the MACD Indicator a Good Tool for Buy-and-Hold Investors?

The MACD indicator can be a powerful tool for long-term investors—but only when used correctly. Instead of relying on MACD for short-term trades, use it as a confirmation tool alongside intrinsic value analysis and fundamental research.

By focusing on weekly and monthly MACD signals, looking for bullish divergences, and ensuring a stock is fundamentally strong, investors can use MACD to buy high-quality stocks at the right time—setting themselves up for long-term success.

Happy Investing!