Exposing the true nature of MACD: It's a lie that you can make money with indicators; if you don't know the essence, you'll fall into a trap.

Most of the discussions about how to use MACD in the market are completely wrong. Today, I will fully uncover the truth behind this “king of indicators.”

The True Meaning of Moving Average (MA)

To understand MACD, you first need to know about moving averages.

The moving average is merely the average of past prices. The 5-day line is the average of the closing prices over the past 5 days. It has absolutely no power to predict the future.

For example, let's say that the stock price fluctuated between 5 and 6 yuan, but one day it rose to 7 yuan. The short-term line (5-day line) reacts sensitively and turns upwards. However, the long-term line (26-day line) hardly moves. A single large number affects the average of a small set of numbers, but it has little impact on the average of a large set of numbers.

The important thing is here: the stock price pulls the line. The line does not pull the stock price.

Common Misunderstanding

“10-day line = Average cost of buyers over the last 10 days” ← False. This is because it does not take into account the trading volume.

“Be careful when the moving averages intertwine; a big price movement is coming soon” ← This is also false. It's simply that a long-range market has persisted for a long time.

The Three Elements of MACD

Element 1: DIF = 12-day EMA − 26-day EMA

The further the 12-day line and 26-day line are apart, the more the stock price accelerates.

• 12-day line is above the 26-day line → Uptrend → DIF > 0
• DIF crosses above the zero line → Golden Cross
• DIF crosses below the 0 line → Dead Cross

Golden Cross = Buy Signal? This is also a lie. The short-term line just reacts sensitively. If the rise doesn't continue afterwards, it's all a deception.

It works in trending markets. But in ranging markets, it deceives a lot. Since no one knows what the future market will be like, it ultimately becomes a game of chance.

Divergence is also a topic of discussion, but this is also past information. It is common for divergence to deviate with positive news in the future. Moving averages only look at the past.

Element 2: DEA = 9-day moving average of DIF

A further smoothed version of the DIF.

• DIF crosses above DEA → DIF is expanding
• The momentum of stock price increases is accelerating.

Element 3: Red bar and green bar = (DIF − DEA) × 2

A visualization of the distance between DIF and DEA. The longer the bar, the stronger the upward (or downward) force.

Conclusion: The future cannot be predicted with MACD

MACD is just a tool to explain past price movements. It's like a doctor's stethoscope. There is no guarantee that the symptoms shown on the electrocardiogram (MACD) will continue tomorrow.

There is a story called “Russell's Chicken.” Every day, the farmer gives the chicken feed, so the chicken “discovers a pattern.” However, on Thanksgiving Day, that pattern ends… the chicken is killed.

Those who chase superficial patterns without knowing the essence of the indicators are like this chicken.

The important thing is not how to use the indicators, but to understand their essence.