MACD and volatility

"You're going to make mistakes in life, no question about it. You don't want to make them on the big decisions — who you marry, and things like that."

You're going to make mistakes in life, no question about it. You don't want to make them on the big decisions — who you marry, and things like that.

MACD tracks shifts in momentum's direction, while volatility measures how much a price swings - two different pieces of information that often get confused with each other.

MACD (Moving Average Convergence Divergence) compares two exponential moving averages over different horizons: its histogram grows when bullish momentum is strengthening, and shrinks - or turns negative - when momentum is turning down. It's useful for spotting a change in direction before it's obvious from price alone.

Volatility measures how much a stock's price swings over time, not whether the company is sound or risky in the sense a value investor cares about. A company with a rock-solid balance sheet can have a highly volatile stock just because it's followed by short-term traders; a fragile company can have a seemingly stable price right up until its problems all surface at once.

MACD and volatility tell very short-term stories, and can tempt you to react to every swing: sell when the histogram turns negative, buy when it turns positive again. But the biggest risk for someone investing with a long horizon isn't missing a signal that lasts a few weeks: it's being talked into selling a solid company over a temporary decline, or buying a fragile one just because its price is rising. The decisions that really matter - which companies to own, and for how long - are made by looking at the fundamentals, not the MACD histogram.