The expert people of the stock market tend to use many tools for making decisions. Fundamental analysis and technical indications are used by them. Non-expert, ordinary investors in the stock market can use very simple technical analysis tools in order to enhance their investment performance.
One of the simplest tools is the use of Moving Average (MA), which generates a smoother graph of the underlined stock or index. The average is calculated for a redefined days back, or weeks back, depending on the frequent transactions the investor does. A moving average (MA) of 12 weeks can provide the sense of short term tendency of the market. It changes slowly than the stock/index itself. A moving average of 26 weeks provides a longer term tendency of the market. It is much slower that the stock graph itself.
In a positive market, “bullish” market, the 12-week MA is higher that the 26-week MA. The difference between the 12-week MA and the 26-week MA is thus positive, and its value can tell you something about the strength of the trend in the market. Once this difference equals zero, and then becomes negative, this is somehow an indication to a negative trend in market, i.e. the market turns to be negative. This is regarded as a “bearish” market. The difference between the short term MA and the long term MA is actually the MACD (Moving Average Convergence Divergence… Ignore the bombastic words… ).
Just need to remember that:
MACD = short MA – long MA.
The MACD, as explained, oscillates around the zero value. When positive it indicates a bullish market, and when negative, it indicates a bearish market. The MACD indicator is called by expertise a momentum oscillator, and they have lots of them for their complicated analysis. For non expertise people, the MACD is a very simple tool. It provides quite a good trend indication for the market, on a weekly time scale.
Now, you do not need to calculate this on your own. Almost any stock market related web site and application provide this basic tool. In such standard tools the short MA is usually 12 weeks, and long MA is usually 26 weeks. But this is up to the user, and can be changed very easily to fit the user needs. So, as a non-expertise investor, who merely wants to maintain his money value and to gain some positive earnings, I do not only look at the fundamental characteristics of the market, I also use simple tool of MACD.
Being an armature investor I usually work with weekly basis charts. This needs follow-up on weekly basis too. Consequently, the transaction frequency is on a monthly basis, i.e. need to do some sell/buy transaction once in several weeks or months, if at all. Having said the above, one needs to pay attention also for the drawbacks of the MACD.
Being a tool that is based on MA, by its nature it is usually in a phase delay compared to the market. This means that it may indicates some significant change in trend only after the trend ahs already changed. So it is useful in a market that does have a clear trend upward or downward. Once the market oscillates with no clear trend, the MACD indication is of less significance. Still the MACD is a very basic useful tool that can be used by non-expertise people, for leveraging their stock market performance.