Hexun Investment Advisor Dong Kai: From Novice to Expert, Stock Basics Lecture 4 MACD

In the previous issue, we learned about moving average systems, which can help us see the trend direction clearly. But sometimes, the moving average has already formed a death cross, and the stock price starts to decline; by the time a golden cross signal appears, the stock price may have already surged. So, is there an indicator that can sense the strength of the trend in advance? The answer is yes, and that is what we will learn today: MACD, also known as the “King of Momentum.”

MACD stands for Moving Average Convergence Divergence. It consists of three parts: the DIF fast line, the DEA slow line, and the MACD histogram. We can think of MACD as a car’s speedometer and acceleration gauge: DIF is the speed, telling you how fast you’re going; the MACD histogram is the acceleration, indicating whether the speed is increasing or decreasing; DEA is the smoothed reference line of the speed. When you see DIF start to rise from the bottom, it indicates that market momentum is shifting from exhaustion to strengthening, which could be a potential opportunity.

The first usage is the golden cross and death cross. Like moving averages, MACD also has golden and death crosses, but note that MACD’s signals are more sensitive and appear earlier than moving averages. A DIF crossing above DEA is a buy signal, meaning DIF crosses from below to above DEA, indicating short-term momentum surpasses long-term momentum, and upward strength is forming. A DIF crossing below DEA is a sell signal, meaning DIF crosses from above to below DEA, indicating short-term momentum is weaker than long-term, and downward pressure begins to show. The key difference is: a moving average golden cross indicates a trend reversal, while a MACD golden cross indicates a momentum shift, which may lead by days or weeks.

The second usage is the zero line crossover. The zero line is the boundary between bullish and bearish momentum in MACD. When DIF crosses above zero, it indicates entering a bullish market; at this point, DIF is greater than 0, short-term moving average is above long-term, and upward momentum dominates. When DIF crosses below zero, it indicates entering a bearish market; DIF is less than 0, short-term moving average is below long-term, and downward momentum dominates. The importance of the zero line is that it tells you the overall market direction: every golden cross above the zero line is a strong market pullback buying opportunity; every death cross below the zero line is a weak market rebound or escape point.

The third usage is divergence, which is MACD’s most powerful feature, helping you preemptively warn of trend exhaustion. Top divergence occurs when the stock price hits a new high, but MACD does not make a new high or even declines, indicating that upward momentum is lagging, and the uptrend may be ending — a sell signal. Bottom divergence occurs when the stock price hits a new low, but MACD does not make a new low or even rises, indicating that downward momentum is weakening, and a rebound may be imminent — a buy signal. Divergence signals are not frequent, but when they appear, they often correspond to major high or low points. When judging divergence, remember three principles: first, the stock price must make at least two new highs or lows for MACD to form a comparison; second, divergence in the MACD histogram is more sensitive than the DIF line; third, divergence can signal several days to weeks in advance but should be confirmed with other indicators.

In summary, three key points: first, buy on golden cross and sell on death cross, but watch whether they occur near the zero line; second, only go long above the zero line and only go short below it; third, divergence is a strong warning signal and should be confirmed with other indicators. The three elements of MACD are the DIF fast line, DEA slow line, and MACD histogram. Its core uses are the buy/sell signals from golden/death crosses, the zero line crossover indicating bullish/bearish shifts, and divergence signals warning of trend exhaustion. The main idea is that momentum leads price. MACD allows you to sense the strength or weakness of momentum before the trend truly reverses, which is what professional traders often say — don’t wait for prices to hit new highs or lows to act; prepare early when momentum starts to fade.