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  • Timothy

How I size my entry positions using Technical Analysis (Part 1): MACD

Let's say we are in the situation where we are looking at a chart, and there's a strong downtrend showing. Having the ability to know when a trend reversal is coming will help us greatly. If there is continued strong sell demand, then it makes more sense to wait on the sidelines, until the trend reversal is clear.

Now, there are many types of TA indicators that show potential reversals. It can range from the very 'simple' indicator of support and resistance levels, to the stranger-named ones like the Sushi Roll Reversal.

I'm not a day trader. I don't even trade at all (which I personally define to be buying/selling the same security within a 30-day window), so I want something that is simple to use, and easy to spot. Nothing too complicated.

The MACD can help in this instance. As it is a momentum-type indicator, it can help to show how strongly the price of a security is moving upward or downward.

Now, this is great for us because we want to, as much as possible, get a snapshot of the market's appetite.

By knowing how strong the trend is moving, we can at the very least get a sense of whether how long the trend may last for.

The question we want answered (as much as possible) is this: Should I enter now, or wait?

For those who are seeing for the first time, the MACD indicator is the graph at the bottom (with the blue and red lines).

The 'crossover' is when the MACD (blue) intersects with the Signal line (red). A bullish crossover occurs when the MACD goes above the Signal line. A bearish crossover occurs when the MACD goes below the Signal line.

Now, two things to note here:

  • First, notice that before any crossover happens, the MACD line usually starts to change direction first.

  • Second, the price tends to be already reversed when both lines intersect. You can see this in all the purple boxes I have drawn above. If you compare it with the price chart, you'll see that the the crossover always tend to lag behind than the actual reversal.

With that in mind, by looking at the MACD indicator over the last few days, we can see that both the MACD and Signal line don't look to be intersecting anytime soon. That to me is an indication that the downward trend may still continue, which means two things to me:

  • I can start to average down, BUT only in bite-sized pieces as I expect prices to still fall in the short-term

  • I can totally sit out for now, and continue to adopt a wait-and-see approach.

Being a kiasu person, I usually go for option 1 i.e. start to average down in small nibbles.

The MACD indicator is one of my most-used, because it gives me the information I need at a glance.

As always, do your own due diligence.

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