Here’s a smart, concise defence of momentum investing from Accrued Interest.
While using technical trading indicators such as a MACD may not be for everyone, Accrued Interest at least makes a pretty rational argument in favour of technical trading that goes beyond the weak idea that we should merely use indicators just because other people are.
Even if you are the only person looking at MACD’s in the world, the following still holds.
Accrued Interest: I think whenever we are using technical analysis, we have to remember why it might work. Charts and patterns aren’t some mystical energy field that controls the market’s destiny. Its merely a means of gauging the market’s mentality. Take a very simple indicator like the MACD, which is one I like a lot. All it basically shows is whether the 2 week moving average is lower or higher than the 1 month moving average. What does that tell you? Merely that price gains (or losses) are accelerating. In other words, is there momentum?
There is solid logic to the idea that stocks might follow a momentum-type pattern, that is that market participants won’t all draw the same conclusion about a stock at the same time. Some will buy in early and some will buy in later. If IBM stock has positive momentum, maybe that means more and more people believe the company is executing on its strategy.
From a technical stand point, if positive momentum develops, that might be an indicator that some early adopters are buying the stock. You can buy in hoping that others will follow those early adopters.