How Can You Identify Support and Resistance Indicators?

Support and resistance levels can be determined in many ways, including: round numbers in a stock's price, the volume of buy and sell orders, and historical highs and lows of stock price.

InvestX Archives | Page 16 of 25

Aug

2023

Beginners Guide to Understanding Support and Resistance

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

Support and resistance are price levels that traders look at when they’re applying technical analysis to their investing. “Support” is where the price of an asset tends to stop falling and “resistance” is where the price tends to stop climbing.

While support and resistance levels are rarely the sole indicators used to determine when to buy or sell, they can provide helpful clues to estimating when a price trend may pause or reverse. That can be critical for investors to know and understand as they fine-tune their strategies.

What Is Support and Resistance?

As noted, support and resistance are price levels used by traders and investors. Specifically, they’re used as a part of what is called technical analysis, which involves looking at a number of technical indicators that describe how a stock is performing – and trying to determine what it may do in the future.

Specifically, support and resistance levels can be plotted on a stock chart to try and create a visual representation of a stock’s value range – it doesn’t tell a trader everything, but sort of gives a visual as to the “range” a stock’s value sits within. In short, at the higher end of the range a stock may hit “resistance,” while at the lower end, it may find “support.” That’s not to say that values don’t break out of that range – they can and do – but support and resistance act more as a general guideline for traders.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Technical Analysis 101

Technical analysis is a type of trading method that uses price patterns to forecast future movement. It differs from fundamental analysis, which is based on using a company’s financials, like its earnings and revenue. Professional technical analysts are called Chartered Market Technicians or CMTs.

A general rule of thumb in investing is that past performance never guarantees future results. However, technical analysts believe that because of market psychology and sentiments like fear and greed, history tends to repeat itself. For instance, if an asset falls a certain amount, buyers tend to swoop in.

In addition to price levels and their historical patterns, technical analysts may look at volume, oscillators – such as the Stochastic Oscillator, and momentum.

Another aspect of technical analysis is that it can be self-fulfilling. If many investors and traders believe a certain price is important, they may use stop-loss orders at certain levels. That, in turn, makes it likely those points will trigger a reversal or pause in an asset’s direction.

How Do You Identify Support and Resistance Indicators?

The support level is typically a price point at which investors or traders expect a downward price trend to pause or reverse. A resistance level is the price point at which an upward price trend is expected to pause or reverse.

Here are some different ways in which support and resistance levels can be determined.

1. Round Numbers

Round numbers like $100, $500 or $10,000 can be levels at which investors, traders and analysts believe a price trend will hit support or resistance.

For instance, in a hypothetical example in the stock market, a company’s shares may climb steadily and struggle to surpass the $100 level. This may be driven more by market sentiment, as the market doesn’t believe the stock can consistently trade above that $100 level.

There could also be a more fundamental reason, such as the $100 level pushing the valuation – something like the stock’s price-to-earnings ratio – to a level the market believes is too expensive.

2. Buy and Sell Orders

Technical analysts may come up with support and resistance points by studying where buy and sell orders are congregated. In other words, they’re determining support and resistance levels by the volume of trades.

Investors, traders and analysts may have access to actual buy or sell order books. They could study price targets that bank research analysts set. They may also scour sources like social-media platforms to get a sense of where investors believe the stock may find a floor or hit a ceiling.

3. Historical Highs and Lows

A previous high or low for an asset may be deemed a level at which there’s support or resistance.

For instance, let’s say Company Y stock had months ago climbed to hit a price level but then reversed. If Company Y stock nears that level again, investors may believe that’s a resistance point where the shares may struggle again.

How to Trade Using Support and Resistance Levels

There are roughly four types of investors who may be using trade and resistance levels:

1. Investors who are long and waiting to buy at a support level,

2. Investors who are shorting a stock or asset and may close their position,

3. Investors on the sidelines and want to buy at a support price,

4. Investors on the sidelines and simply monitoring to learn more about the stock.

One common way investors and traders utilize support and resistance levels is through stop-loss orders. Stop-loss orders are in general popular when it comes to technical analysis trading. They involve placing an order with an investor’s brokerage account to buy or sell once an asset reaches a specific price.

Recommended: How to Open a Brokerage Account

Stop-loss orders are a way for investors to manage their portfolio without having to monitor their holdings every day.

For example, let’s say an investor believes $1,000 is a level of resistance for Company Z stock. They could set a stop-loss order to sell the stock at $1,000, which the brokerage firm will automatically execute once the shares hit that price.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Support and resistance levels are price points at which investors and traders in a market expect trends to reverse or take a pause. Individuals can think about support and resistance levels as the potential floors and ceilings for price moves in an asset.

While there’s no guarantee support and resistance levels come true, it can be a helpful way to try to time the market or have specific price points to monitor. They may also use these prices to gauge whether the velocity of a price movement will slow down, pick up or reverse course.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jul

2023

Understanding the Greeks in Options Trading

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

The “Greeks” in options trading — known as delta, gamma, theta, and vega — are metrics that help traders understand the value and pricing of a given options contract.

Because options are derivatives, the value of each contract — the premium — depends on a complex interaction of different factors, including time to expiration, price volatility, and changes in the value of the underlying security. Each of these factors is represented by a Greek letter.

While there are a number of options Greeks to explore, delta, gamma, theta, and vega are the four main Greeks in options trading.

Options Greeks may sound like a foreign language, but to options traders the Greeks are essential to understanding how, or if, they’re making any money, since it can be so difficult to understand the true value of an option.

A Quick Look at Options

“Options” is short for “options contracts,” which are a type of investment that traders buy and sell much like stocks and bonds. But options are derivatives — that is, they aren’t really assets in and of themselves. Instead, their value (or lack thereof) derives from another underlying asset, typically a specific stock.

Traders buy different types of options, when they think that stock prices will go up (a call) or down (a put). They also use options to hedge or offset investment risks on other assets in their portfolio.

In a nutshell, though, traders typically buy options through an investment broker. Those options give investors the option, but not the obligation, to buy or sell a security at a later date, and at a specific price. Investors can buy an option for a price, called a premium, and then buy or sell that option.

So, while an option itself is a derivative of another investment, it can gain or lose value, too. For example, if an investor were to buy a call option on Stock A — basically, a bet that Stock A’s share price will increase — the value of that call option would go up if Stock A’s price goes up.

But the opposite would be true if an investor purchased a put option on Stock A, betting that Stock A’s price would go down. Similar to shorting a stock, the investor would effectively lose their bet (and see the value of their option fall) if Stock A’s share price increased.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

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What Are Option Greeks?

Options traders use these letters to describe their option positions and make their best guess as to what might happen next with those positions as they relate to the underlying stocks.

In short, the Greeks look at different factors that could impact the price of an option. Calculating the Greeks isn’t an exact science. Traders use a variety of formulas, usually by a mathematical model. Because of that, these measurements are usually all theoretical.

Here’s a look at the most common Greeks used by traders.

Recommended: Options Trading Terms You Need to Know

Delta

Delta measures how much an option’s price will change if the underlying stock’s price changes. Specifically, it measures the option’s price change in relation to every $1 change in the underlying stock. It’s usually expressed as a decimal, like “0.50,” for example.

So, if an option has a delta of 0.50, in theory, that means that the option’s price will move $0.50 for every $1 move in the stock’s price. Another way to think of delta is that it gives an investor an idea as to the probability that they’ll make money from an option. If delta is 0.50, for example, that can equate to a 50% chance or so that an option will expire in the money — that an investor’s bet will have paid off.

Gamma

The second Greek, gamma, tracks the sensitivity of an option’s delta. If delta measures how an option’s price changes in relation to a stock’s price, then gamma measures how delta itself changes in relation to a change in the stock’s price.

Think of an option as a car going down the highway. The car’s speed would be its delta. The car’s acceleration would be its gamma, as acceleration is measuring the change in speed. Gamma is also typically expressed as a decimal. If we go back to our earlier example — that delta is 0.50 — and delta changes to 0.6, then gamma would be 0.1.

Theta

Theta measures an option’s sensitivity to time. It gives investors a sense of how much an option’s price decreases the closer it gets to expiration.

Similar to the “car on a highway” analogy, it may be useful to think of an option as an ice cube sitting on a countertop. The ice cube melts away — or, the option’s time value diminishes — and the melting becomes more rapid over time.

Theta is typically expressed as a negative dollar amount, and represents how much value an option loses each day as it approaches expiration.

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Vega

Finally, vega is a measure of an option’s sensitivity to implied volatility.

Markets are volatile, and securities (and their derivatives) are subject to that volatility. Vega attempts to measure how much an option’s price will change as it relates to the underlying security’s volatility.

Volatility refers to the turbulence a security’s value experiences. We don’t know what level of volatility a security or option will experience in the future, however, so there’s a certain amount baked into the mix — that’s implied volatility. It’s the expected future level of volatility.

Changes in stock volatility can change an option’s value. That’s what vega is measuring — not volatility itself, but the option’s sensitivity to volatility changes.

And like delta and gamma, vega is expressed as a number, rather than a dollar figure.

5 Main Options Greeks: Overview

In summary, here’s how an investor may use this data when analyzing the risk and reward of an options contract.

Name	Symbol	Definition	How investors might think about it
Delta	∆	Measures the sensitivity of an option’s price to a change in the price of the underlying security.	For example, if the delta is 0.50 means that the option’s price will move $0.50 for every $1 move in the stock’s price. It can also indicate a 50% chance or so that an option will expire in the money right now. This probability may change over time and isn’t a guarantee.
Gamma	γ	Measures the rate of change for delta. It tells you how quickly delta will change as the stock price changes.	Think of an option as a car on the highway with its speed (delta) and acceleration (gamma, often expressed as a decimal). A stock trading at $10 with a delta of 0.4 and gamma of 0.10 means that a $1.00 increase in the stock’s price will adjust the delta by 0.10, increasing it to 0.50 and vice versa with a $1 decrease it will decrease delta to 0.3 impacting how quickly the value of the option will increase or decrease with further price movements.
Theta	θ	Measures the sensitivity of an option’s price to the passage of time.	An option’s theta is like an ice cube melting on a countertop – the time value diminishes as it melts and the melting becomes more rapid over time. This is expressed as a negative dollar amount. For example, a theta of -1 indicates that the option will lose $1 per day until it reaches the expiration date.
Vega	ν	The change in an option’s value as implied volatility goes up or down by 1 percent.	Vega rises with greater price swings (higher implied volatility), indicating higher uncertainty. Lower implied volatility implies lower uncertainty and smaller price movements.
Rho	ρ	Measures the sensitivity of an option’s price to a change in interest rates.	If an option has a rho of 1.0, a 1% increase in interest rates leads to a 1% increase in value. Options most sensitive to interest rate changes are those at-the-money or with the longest time to expiration.

Other Options Terminology to Know

The specific options (a call versus a put, for example) and the underlying stock’s performance determines whether an investor comes out ahead on their bet. That brings us to a few other key options terms that are important to know:

In the Money

A call option is “in the money” when the strike price is below the market price. A put option is “in the money” when the strike price is above the market price.

Out of the Money

A call option is “out of the money” when the strike price is above the market price. A put option is “out of the money” when the strike price is below the market price.

At the Money

The option’s strike price is the same as the stock’s price.

The Takeaway

There’s no getting around it: Options, and the Greeks, can get complicated, and may not be the best investment strategy for beginners. But experienced traders, or those willing to spend time to learn how to understand options, find them a valuable tool in creating an investment strategy.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Invest with as little as $5 with a SoFi Active Investing account.

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SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Jul

2023

What Is UCITS?

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Undertakings for Collective Investment in Transferable Securities (UCITS) are a category of investment funds designed to both streamline and safeguard investment transactions. UCITS are usually structured like traditional mutual funds, exchange traded funds, or a money market fund.

The European Union (EU) regulates UCITs, but they are widely available to non-EU investors. U.S. investors, for example, can buy shares of UCITS through U.S.-based fund managers, although local, EU-based money managers run the funds. Because they undergo a high level of regulatory scrutiny, many view UCITS as a relatively safe investment.

What Is a UCITS Fund?

UCITS funds are a type of mutual fund that complies with European Union regulations and holds securities from throughout the region. They emerged as part of an effort by the European Union to consolidate disparate European financial investments into one central sector, governed by the EU, with a “marketing passport,” that enables financial services firms across the EU to invest in multiple countries under a common set of rules and regulations.

The EU launched UCITS for two primary reasons:

1. To structure a single financial services entity under the EU umbrella that allowed for the cross-sale of mutual funds across the EU, and across the globe.

2. To better regulate investment asset transactions among all 28 EU member countries, giving investors inside and outside of the EU access to more tightly regulated investment funds.

Fundamentally, UCITS funds rules give EU regulators a powerful tool to centralize key financial services issues like types of investments allowed, asset liquidity, investment disclosures, and investor safeguards. By rolling the new rules and regulations into UCITS, EU regulators sought to make efficient and secure investment funds available to a broad swath of investors, primarily at the retail and institutional levels.

For investors, UCITS funds offer more flexibility and security. Not only are the funds widely viewed as safe and secure, but UCITS funds offer a diversified fund option to investors who might otherwise have to depend on single public companies for the bulk of their investment portfolios.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

A Brief History of UCITS

The genesis of UCITS funds dates back to the mid-1980’s, with the rollout of the European Directive legislation, which set a new blueprint for financial markets across the continent. The new law introduced UCITS funds on an incremental basis and has been used as a way to regulate financial markets with regular updates and revisions over the past three decades.

In 2002, the EU issued a pair of new directives related to mutual fund sales — Directives 2001/107/EC and 2001/108/EC, which expanded the market for UCITS across the EU and loosened regulations on the sale of index funds in the region.

The fund initiative accelerated in 2009 and 2010, when the Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 clarified the use of UCITS in European investment markets, especially in coordination of all laws, regulations, and administrative oversight. The next year, the European Union reclassified UCITS w as investment funds regulated under Part 1 of the Law of 17 December 2010.

In recent years, “Alt UCITS” or alternative UCITS funds have grown in popularity, along with other types of alternative investments.

How Does a UCIT Fund Work?

Structurally, UCITS are built like mutual funds, with many of the same features, regulatory requirements, and marketing models.

Individual and institutional investors, who form a collective group of unit holders, put their money into a UCIT, which, in turn, owns investment securities (mostly stocks and bonds) and cash. For investors, the primary goal is to invest their money into the fund to capitalize on specific market conditions that favor the stocks or bonds that form the UCITS. UCTIS funds may provide one way for American investors to get more international diversification within their portfolios.

A professional money manager, or group of managers, run the fund, and they are singularly responsible for choosing the securities that make up the fund. The UCITS investor understands this agreement before investing in the fund, thus allowing the fund managers to choose investments on their behalf.

An investor may leave the fund at any point in time, and do so by liquidating their shares of the fund on the open market. American investors should know that the Internal Revenue Service may classify UCITS as passive foreign investment companies, which could trigger more onerous tax treatments, especially when compared to domestic mutual funds.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

UCITS Rules and Regulations

UCITS do have some firm regulatory and operational requirements to abide by in the European Union, as follows:

• The fund and its management team are usually based on a tax-neutral EU country (Ireland would be a good example.)

• A UCITS operates under the laws mandated by the member state of its headquarters. After the fund is licensed in the EU state of origin, it can then be marketed to other EU states, and to investors around the world. The fund must provide proper legal notification to the state or nation where it wants to do business before being allowed to market the fund to investors.

• A UCITS must provide proper notice to investors in the form of a Key Investor Information Document, usually located on the fund’s website. The fund must also be approved.

• A UCITS must also provide a fund prospectus to investors (also normally found on the fund’s web site) and must file both annual and semiannual reports.

• Any time a UCITS issues, sells, or redeems fund shares, it must make pricing notification available to investors.

The Takeaway

As discussed, Undertakings for Collective Investment in Transferable Securities (UCITS) are a category of investment funds designed to both streamline and safeguard investment transactions. Note that while UCITS are usually structured like traditional mutual funds, exchange traded funds, or a money market fund.

UCITS may be an interesting type of investment for U.S. investors looking to diversify their portfolios. As with any investment, investors must conduct thorough due diligence on the UCITS, which should include a review of fund holdings, past performance, management stability, fees, and tax consequences.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Jul

2023

Investing in Gold and Silver: a Guide

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Precious metals can be an important part of a diversified portfolio. Here’s what to know before you invest.

Jul

2023

Complete Guide to the Moving Average Convergence Divergence (MACD) indicator

What Is MACD?

By Colin Dodds | Financial Independence, Growing Wealth, invest, Investing | Comments Off

The moving average convergence divergence (MACD) is an indicator that shows the momentum in equity markets. It’s especially popular with traders, who use it to help them rapidly identify short-term momentum swings in a stock.

A moving average can help investors see past the noise of daily market movements to find securities trending up or down. The MACD offers another way to focus on such stocks, by showing the relationship between two moving averages.

Understanding the Moving Average

The moving average convergence divergence may sound complex, so it makes sense to start with the first part – the moving average (MA), also called the exponential moving average, or EMA. This is a very common metric with stocks, used to make sense of ever-fluctuating price data by replacing it with a regularly updated average price. This moving average can give investors a clearer idea of where a stock is trading than one that’s updated second by second.

Because the moving average reflects past prices, it is a lagging indicator. But how much the past prices factor in depends on the person setting the average. Most commonly, investors look at moving averages of 15, 20, 30, 50, 100, and 200 days, with the 50- and 200-day averages being the most widely used.

A moving average with a shorter time span will be more sensitive to price changes, while moving averages with longer time spans will fluctuate less dramatically. Generally, active traders with strategy focused on market timing favor shorter-duration moving averages.

To perform the MACD calculation, traders take the 26-day moving average of a stock and subtract it from that stock’s 12-day moving average. This calculation offers a quick temperature-check of a stock’s momentum.

While the 12-day and 26-day time spans are standard for the MACD, investors can also create their own custom MACD measurements with time spans that better fit their own particular trading tactics and investment strategies.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

How to Read MACD

If a stock’s MACD is positive, that means its short-term average is higher than its long-term average, which could be a bullish indicator that stock is on an upswing. A higher MACD indicates more pronounced momentum in that upswing. On the other hand, a negative MACD indicates that a stock is trending downward.

If the positive or negative difference between the shorter-term and longer-term moving averages expands, that’s considered the MACD divergence, or the D in MACD. If they get closer, that’s considered a convergence, the C in MACD.

When the two moving averages converge, they meet at a place between the positive and negative MACD, called the zero line, or the centerline. For many traders, this MACD crossover is the sign they wait for to jump into a stock, which after losing value, is suddenly gaining value. Conversely, a stock crossing the zero line of the MACD is often taken to mean that the good times are over, leading many traders to sell at that point.

The MACD is a vital concept in technical analysis, a popular approach investors use to try to forecast the ways a stock might perform based on its current data and past movements. It involves a wide range of data and trend indicators, such as a stock’s price and trading volume, to locate opportunities and risks.

Technical analysis does not look at underlying companies, their industries, or any macroeconomic trends that might drive their success or failure. Rather, it solely analyzes the stock’s performance to find patterns and trends.

Recommended: The Pros and Cons of Momentum Trading

The MACD as a Trading Indicator

For traders, a rising MACD is a sign that a stock is being bid up. The MACD shows how quickly that’s happening.

As the short-term average rises above the longer-term average, and the two figures diverge more widely, the MACD expresses this in a simple number. When a stock is sinking, investors also want to know how fast it’s falling, as well as whether its decline is speeding up or slowing down, which they can find quickly by looking at the divergence.

A convergence is also a key indicator for many traders. As the long-term and short-term moving averages get closer to one another, it can be a sign that a given stock is either overbought or oversold for the moment. If they hold the stock, it may be time to sell the stock. But if they like the stock, and are waiting for a bargain-basement price at which to buy it, then the convergence of the two averages on the zero line may mean it’s time to start buying.

By using the MACD, traders can also compare a stock to competitors in its sector, and to the broader market, to decide whether its current price reflects its value and whether they should buy, sell, or short a stock. Because the MACD is priced out in dollars, many traders will use the percentage price oscillator, or PPO. It uses the same calculation as the MACD, but delivers its results in the form of a percentage difference between the shorter- and longer-term moving averages. As such, it allows for quicker, cleaner comparisons.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

The Pros and Cons of the MACD

The MACD indicator has benefits for traders. It’s a convenient gauge of a stock’s momentum for an active, short-term trader. But it can also help a long-term investor who’s looking for the right moment to buy or sell a stock. Once an investor understands the MACD, it’s an easily interpreted data point to incorporate into their trading strategy.

But the MACD does have its drawbacks and does not account for certain types of investment risk. Because the MACD is a lagging indicator, it can lead to a trader staying too long in a position that’s since begun to swoon. Or, alternately, it can indicate a turnaround that’s already run the bulk of its course.

This is especially dangerous in volatile markets, when stocks can “whipsaw.” This term – named for the push-and-pull of the saw when it’s used to chop down a tree – describes the phenomenon of a stock whose price is moving in one direction, and suddenly goes sharply in the opposite direction. Whether that whipsaw movement is up or down, it can prove highly disruptive for a trader who relies too heavily on the MACD.

The Takeaway

The MACD can be a helpful metric for traders to understand and to use, in conjunction with other tools to help formulate their investing strategy.

The MACD indicator has benefits for traders. It’s a convenient gauge of a stock’s momentum for active traders. But it can also help long-term investors, too, determine when to buy and sell. It’s also a lagging indicator, which can make it tricky to use for inexperienced traders. As always, it’s best to consult with a financial professional if you’re feeling like you’re in over your head.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN623006

Beginners Guide to Understanding Support and Resistance

What Is Support and Resistance?

Technical Analysis 101

How Do You Identify Support and Resistance Indicators?

1. Round Numbers

2. Buy and Sell Orders

3. Historical Highs and Lows

How to Trade Using Support and Resistance Levels

The Takeaway

Understanding the Greeks in Options Trading

A Quick Look at Options

Finally, user-friendly options trading is here.*

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What Are Option Greeks?

Delta

Gamma

Theta

Vega

5 Main Options Greeks: Overview

Other Options Terminology to Know

In the Money

Out of the Money

At the Money

The Takeaway

What Is UCITS?

What Is a UCITS Fund?

A Brief History of UCITS

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How Does a UCIT Fund Work?

UCITS Rules and Regulations

The Takeaway

Investing in Gold and Silver: a Guide

What Is MACD?

Understanding the Moving Average

How to Read MACD

The MACD as a Trading Indicator

The Pros and Cons of the MACD

The Takeaway

CATEGORIES

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Finally, user-friendly options trading is here.^*

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