MACD (ii)

<<<<<<< HEAD

MACD

Introduction

So, we've looked at what the MACD is, where all it's components are derived from and what trading signals it produces.  Now we're looking at how to trade with the MACD.  Traders use the MACD indicator in a number of ways to realise a trading opportunities. So in this lesson we'll concentrate on the following trading signals that can form part of a trading strategy:
  • The MACD/Price Divergence
  • The MACD Histogram Crossover and Divergence
  • The Signal/Trigger Line Crossover 
  • The MACD zero line crossover
In our last section on The MACD we discovered the indicator is best used in trending markets and shouldn't really be used in range bound markets – not even to predict a new trend. The MACD indicator allows us to determine how strong a trend really is (or if we’re in a range). If the MACD is hovering and flat around the zero line then this identifies a range bound market and if the MACD is trending strongly through or from zero (up or down) then there will be a strong trend. We can see this in the below McDonalds Chart. 

Using MACD to Identify Trends

So the MACD and it's histogram should be used for trading in trending markets.  Once we have established a primary trend within your trading time frame (Dow Theory Tenet 1) there are a number of ways we can trade with the MACD. Where we're hoping to benefit on the continuation of this trend from a retracement (Secondary Trend).

Trading the MACD/Price Divergence 

The MACD Divergence is either loved or hated by traders and often gives us false signals.  The Divergence between the direction of the market price and the MACD can signal a weakness in trend.  When the MACD trends in the opposite direction to the market price this is a signal that the markets momentum MAY reverse at some point. This can be seen through a positive and negative divergence between price and The MACD. Be aware though, that there are plenty of situations where trend hasn't reversed on MACD divergences.

In the below chart we have examples of positive and negative divergence. Positive divergence is seen when the MACD is increasing (making higher peaks and higher troughs), while less than zero, against a downtrend in price (lower peaks and lower troughs) – This is a Bullish Divergence (although the market is still in a bearish primary trend, we anticipate a bullish retracement or reversal based on the positive divergence). A negative divergence occurs when The MACD trends down, while above zero, against an up trend in price – A Bearish Divergence. So this negative divergence signals a bearish price reversal sometime in the future.

These Divergences occurs because the current price momentum is slowly being outpace's by the growing opposite momentum, where this opposite momentum may take some time to be strong enough to win the day.  You can see in this case the Momentum did shift while the MACD was in positive and negative divergence, indicated by the yellow line.


MACD Divergence

The MACD divergence is an indicator which really needs to be used in conjunction with other indicators. The MACD divergence tells us trend may reverse at some point due to a shift in momentum.  Other indicators needed will include volume.  Volume is important here because as momentum wanes volume should decrease, indicating a lack of conviction in the current trend.  This divergence (along with histogram resistance) is particularly useful if the divergence shows a secondary trend (retracement) possible reversal.  This may indicate the primary trend is about to begin again, which is a signal for trend traders to enter the market.

Instead of an indicator that is going to trigger trading signals, MACD Divergence is really an early warning system.  Many traders will wait for the trend to confirm its reversal before entering the market - using the MACD divergence as a filter, only entering  MACD/signal line crossover signals after a divergence. As we can see in the above chart the green circles represent possible entry points where the MACD crosses the signal line. Trend traders may give the 1st circled entry point a miss, as it's against the primary trend and hopefully just a retracement to the downward trend resistance line.  The 2nd entry point would interest a trend trader though, as it's signalling a trend and momentum continuation.  Many divergences will last for a long time, so patience is needed.

Trading the MACD Histogram

As well as setting up trading strategies around the MACD divergence and its signal, traders may also set up trading strategies around the MACD Histogram. Remember, the MACD histogram is a derivative of the MACD and it's 9 day MA signal - measuring the distance between the two, therefore changes in momentum.  There are two ways of using MACD histogram to trade - The zero crossover and the divergence.  The crossover will produce actual trading signals, where momentum and trend have changed, while the divergence is more subtle.  The histogram divergence is almost a filter, or early warning system.  It allows traders to see slight changes in momentum (even though price trend looks the same to the naked eye), which may lead to a full blown trend reversal in the future.  Traders may filter out all MACD/signal line triggers that aren't associated with a divergence.

Trading the MACD Histogram Zero Crossover

The Histogram zero line crossover occurs when the MACD equals the MACD 9-day moving average (it's signal).  It's  exactly the same as trading the MACD/signal line crossover as discussed later in this section, just graphically different.  So, we won't spend much time on it here.  

Trading signals are triggered when the the histogram crosses it's zero line. When the histogram crosses above the zero line buy signals are triggered and when the histogram crosses below the zero line, sells signals are generated.  I've shown this in the chart below.  As shown these signals occur when the MACD and it's signal cross. Once again, the MACD histogram should only be used in a trend following strategy.

Trading The MACD Histogram Crossover

Trading The Histogram Divergence

The histogram divergence is used in many respects to anticipate a MACD-Signal crossover - an early warning system if you like, when trading with the trend. It can be used effectively as a filter to all those MACD/signal line crossovers, filtering out crossovers that don’t have a divergence associated with it. There are 2 types of histogram divergence - The Peak-Trough and Slant divergences. In both cases, generally, a full-bodied divergence generating over a few weeks is a better indicator than a shallow divergence developing over a few days – so go long and large, not short and shallow.

We have two examples of the Peak-Trough Histogram Divergence – one Positive and one negative. A negative (or bearish) divergence forms when the histogram makes consecutive lower peaks and the MACD and price form consecutive higher peaks – price momentum is weakening in a similar way to the MACD divergence above. This can be seen in "The MACD Histogram Peak-Trough Negative Divergence" Chart . 

We have a histogram negative divergence indicating a possible price reversal to the bearish side. This price reversal is confirmed when the MACD crosses below the signal, which could be a trade entry point to short the USD against Japanese Yen (green circle). As with the MACD divergence the Histogram divergence indicates many false trade signals; so it’s used as part of an overall trading strategy where other trading tools are also utilised.

The MACD Histogram Peak-Trough Negative Divergence

A Positive histogram Divergence forms when the MACD and price form lower troughs and the histogram forms higher troughs – price momentum is turning away from the downside, to a bullish trend. This can be seen on the below chart “MACD Histogram Positive Divergence” where the lower well-defined troughs on the MACD are highlighted in Red and the Higher well-defined troughs in the histogram are highlighted in green. Notice MACD moved to a lower low in late May, but the histogram formed a higher low. It follows, if traders are using this divergence as an early warning signal before committing, a good entry level maybe Jun 6th or Jun 13th when the MACD crosses above the signal/trigger. Remember, this is a trend following indicator.

The MACD Peak-Trough Positive Divergence

The Slant divergence acts the same way as the peak-trough histogram divergence, but is minus the peaks and troughs. The Histogram in both the positive (bullish) and negative (bearish) divergences will slope towards the zero line indicating that price momentum is weakening and the price of the security is maybe about to turn. (Remember the histogram measures the distance between MACD and it’s 9-day moving average signal line. Momentum weakens as these lines converge).

In the below chart we've zoomed into a section of an IBM weekly chart following a primary up trend.  Within this primary up trend we can see two retracements.  Two positive histogram slant divergences have been highlighted, where the histogram diverges with the price and the MACD itself, indicating a momentum change.  If traders are using the histogram divergence as an early warning to possible momentum change then they will act on the buy signals where the MACD crosses the signal line (or where the histogram crosses zero).  These buy triggers are highlighted with green circles.  These two bullish divergences bring IBM out of retracement back on to the primary trend.



You can also see two negative divergences, one a peak-trough divergence (May-Jul 99) and one a possible slant divergence (Dec 98).  Trend traders will use these negative divergences to highlight where the primary trend maybe about to retrace and sell on the MACD-signal crossover.  Remember, other indicators should be used as part of your trading strategy.

The MACD Signal/Trigger Crossover

We touched upon the trading possibilities of the MACD price crossover in the section – “The Moving Average Convergence Divergence – MACD”. The signal crossover is the most common MACD signal - when the MACD crosses above the 9-day EMA (Exponential Moving Average) trigger line a buy (or exit the short) signal is created and when the MACD crosses below the signal line a sell/short signal is created. This is a great signal confirmation in itself, or just after a divergence and is generally traded with other indicators to get a clearer picture of where momentum is going. Again, this is better used in trending markets.

Below, we have an S&P 500 hourly chart in a primary up trend. We can see how traders utilise this indicator in a trading environment. On the 22nd the MACD (Blue line) crosses below the 9-day EMA trigger line. This indicates that traders should sell a long position. Indeed, momentum shifted to the downside until the MACD crossed above our trigger (white line) on the 27th. This crossover on the 27th is a buy signal where momentum reversed again to continue the primary trend. In effect the area between this sell signal and buy signal is a primary trend retracement.

The signal to exit this long position comes on the 5th when the blue MACD crosses under the white signal. Trend traders may sell here and await the retracement to follow it's course.  On the 7th we can see a criss-cross buy/sell signal. Buying when the MACD is above zero isn't an option for many trend traders, as the momentum change strength isn't generally with the trend trade. In fact we can see a negative divergence here, indicating a turn in momentum to the downside. This turn to the down side may have been a retracement or full blown trend reversal.  Other indicators need to be utilised to indicate whether the retracement is to continue,or not...  Use volume, Fibonacci retracements etc..and see where support and resistance are before trading.

MACD Signal Line Crossover

In the above example I've indicated that traders will sell on the retracements and buy on the continuation of the primary trend.  This may not be the case for all traders.  As part of a trading strategy, a long-term trader may be happy to keep his long position going into a retracement.  He/she may have a long position that only gets sold when long term trend lines are broken, or when previous support areas are lost.  By the end of this course, hopefully you'll be aware of many trading strategies and pick the one best for your needs.

If you find yourself in a situation where you see a buy signal crossover (MACD crosses above 9-day signal) above the zero line. or a sell signal crossover below the zero line, this indicates momentum is continuing and these signals are still valid.  Just be aware of any divergence that you see, indicating the possible change in momentum in the future.

The MACD Zero Line Crossover

As the name suggests the MACD zero line crossover highlights buy/short positions that may be profitable to a trader. When the MACD crosses the zero line it indicates that momentum has already reversed. Traders will employ other indicators into their trading strategy to try to determine whether it’s still a good trade to enter into.  To determine a strong trading signal The MACD will pass the zero line in a strong manner at a decent angle. This will also coincide with a strong histogram indicating good price momentum continuation. If the MACD crosses zero flatly or just above the zero line this indicates a range, which isn’t good to trade with The MACD.

In the Chart Below This strong signal is highlighted on the left where the MACD is also moving away from the 9-day trigger line. This strong MACD and rising histogram (the difference between MACD and trigger) shows good rising price momentum – a good buy signal. In this situation the trade sell signal occurs when the MACD crosses under the signal. As the MACD heads towards zero a “MACD zero line crossover” trade should be anticipated, but only if it crosses in a strong manner. We can see that when the MACD crosses back across zero and the histogram is strong – a good short signal. We can exit the trade at the next MACD/signal crossover.

In the below example out trading profits are indicated by the green and red trend lines. If we had traded the MACD signal/trigger crossover our profits would have been greater between the two trades (indicated by the grey trend lines). However, using the MACD zero line crossover is an extra confirmation that momentum has turned and strong, as well as triggering less false signals.  In effect the zero line crossover is another way of looking at the double moving average crossover, as when the MACD crosses zero, the 2 moving averages cross each other.

MACD zero line crossover

Changing The MACD Parameters

The standard setting for MACD is the difference between the 12 and 26-period EMAs. Chartists looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. MACD(5,35,5) is more sensitive than MACD(12,26,9) and might be better suited for weekly charts. Chartists looking for less sensitivity may consider lengthening the moving averages. A less sensitive MACD will still oscillate above/below zero, but the centerline crossovers and signal line crossovers will be less frequent.

To Sum Up

As you can see there are many ways of incorporating The MACD, in all of it's various forms, into your trend trending strategy. Find what's best for you and test it before setting yourself loose with a trading account. The MACD and MACD Histogram are great for spotting trend, identifying changes in trend & price momentum and establishing trading trigger entry & exit points.  Many trend following trading strategies will have MACD at their heart.  The MACD can't tell us if prices are overbought or oversold though and as the MACD is a derivative of price it's difficult to compare Momentum against different stocks, or against historical prices of the same market.  But it's unique in bringing together trend and momentum.  To compare other markets and historical prices we can use the Percentage Price Oscillator (PPO).  This is MACD's cousin and we'll talk about this next.

We can set the indicators price action sensitivity. The sensitivity of the indicator to price action determines how quickly the trader enters the move and how accurate these trading signals are. If the indicator is set to low sensitivity then you generate less false signals, but you may see the move too late, or not see it at all. With high sensitivity you are more likely to catch the move into the trade, but you may generate false trading signals.  For instance a swing trader (trading with a horizon of 4 to 5 days) may set the MACD to 3, 10, 16 once they've drill down to an hourly chart from a daily chart. Reducing the parameters of the moving averages will increase the sensitivity and highlight more signals - good and bad.  Good charting software will allow the parameters to be changed. 

Technical analysis is not an exact science and although these indicators can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

More...

    
=======

MACD

Introduction

So, we've looked at what the MACD is, where all it's components are derived from and what trading signals it produces.  Now we're looking at how to trade with the MACD.  Traders use the MACD indicator in a number of ways to realise a trading opportunities. So in this lesson we'll concentrate on the following trading signals that can form part of a trading strategy:
  • The MACD/Price Divergence
  • The MACD Histogram Crossover and Divergence
  • The Signal/Trigger Line Crossover 
  • The MACD zero line crossover
In our last section on The MACD we discovered the indicator is best used in trending markets and shouldn't really be used in range bound markets – not even to predict a new trend. The MACD indicator allows us to determine how strong a trend really is (or if we’re in a range). If the MACD is hovering and flat around the zero line then this identifies a range bound market and if the MACD is trending strongly through or from zero (up or down) then there will be a strong trend. We can see this in the below McDonalds Chart. 

Using MACD to Identify Trends

So the MACD and it's histogram should be used for trading in trending markets.  Once we have established a primary trend within your trading time frame (Dow Theory Tenet 1) there are a number of ways we can trade with the MACD. Where we're hoping to benefit on the continuation of this trend from a retracement (Secondary Trend).

Trading the MACD/Price Divergence 

The MACD Divergence is either loved or hated by traders and often gives us false signals.  The Divergence between the direction of the market price and the MACD can signal a weakness in trend.  When the MACD trends in the opposite direction to the market price this is a signal that the markets momentum MAY reverse at some point. This can be seen through a positive and negative divergence between price and The MACD. Be aware though, that there are plenty of situations where trend hasn't reversed on MACD divergences.

In the below chart we have examples of positive and negative divergence. Positive divergence is seen when the MACD is increasing (making higher peaks and higher troughs), while less than zero, against a downtrend in price (lower peaks and lower troughs) – This is a Bullish Divergence (although the market is still in a bearish primary trend, we anticipate a bullish retracement or reversal based on the positive divergence). A negative divergence occurs when The MACD trends down, while above zero, against an up trend in price – A Bearish Divergence. So this negative divergence signals a bearish price reversal sometime in the future.

These Divergences occurs because the current price momentum is slowly being outpace's by the growing opposite momentum, where this opposite momentum may take some time to be strong enough to win the day.  You can see in this case the Momentum did shift while the MACD was in positive and negative divergence, indicated by the yellow line.


MACD Divergence

The MACD divergence is an indicator which really needs to be used in conjunction with other indicators. The MACD divergence tells us trend may reverse at some point due to a shift in momentum.  Other indicators needed will include volume.  Volume is important here because as momentum wanes volume should decrease, indicating a lack of conviction in the current trend.  This divergence (along with histogram resistance) is particularly useful if the divergence shows a secondary trend (retracement) possible reversal.  This may indicate the primary trend is about to begin again, which is a signal for trend traders to enter the market.

Instead of an indicator that is going to trigger trading signals, MACD Divergence is really an early warning system.  Many traders will wait for the trend to confirm its reversal before entering the market - using the MACD divergence as a filter, only entering  MACD/signal line crossover signals after a divergence. As we can see in the above chart the green circles represent possible entry points where the MACD crosses the signal line. Trend traders may give the 1st circled entry point a miss, as it's against the primary trend and hopefully just a retracement to the downward trend resistance line.  The 2nd entry point would interest a trend trader though, as it's signalling a trend and momentum continuation.  Many divergences will last for a long time, so patience is needed.

Trading the MACD Histogram

As well as setting up trading strategies around the MACD divergence and its signal, traders may also set up trading strategies around the MACD Histogram. Remember, the MACD histogram is a derivative of the MACD and it's 9 day MA signal - measuring the distance between the two, therefore changes in momentum.  There are two ways of using MACD histogram to trade - The zero crossover and the divergence.  The crossover will produce actual trading signals, where momentum and trend have changed, while the divergence is more subtle.  The histogram divergence is almost a filter, or early warning system.  It allows traders to see slight changes in momentum (even though price trend looks the same to the naked eye), which may lead to a full blown trend reversal in the future.  Traders may filter out all MACD/signal line triggers that aren't associated with a divergence.

Trading the MACD Histogram Zero Crossover

The Histogram zero line crossover occurs when the MACD equals the MACD 9-day moving average (it's signal).  It's  exactly the same as trading the MACD/signal line crossover as discussed later in this section, just graphically different.  So, we won't spend much time on it here.  

Trading signals are triggered when the the histogram crosses it's zero line. When the histogram crosses above the zero line buy signals are triggered and when the histogram crosses below the zero line, sells signals are generated.  I've shown this in the chart below.  As shown these signals occur when the MACD and it's signal cross. Once again, the MACD histogram should only be used in a trend following strategy.

Trading The MACD Histogram Crossover

Trading The Histogram Divergence

The histogram divergence is used in many respects to anticipate a MACD-Signal crossover - an early warning system if you like, when trading with the trend. It can be used effectively as a filter to all those MACD/signal line crossovers, filtering out crossovers that don’t have a divergence associated with it. There are 2 types of histogram divergence - The Peak-Trough and Slant divergences. In both cases, generally, a full-bodied divergence generating over a few weeks is a better indicator than a shallow divergence developing over a few days – so go long and large, not short and shallow.

We have two examples of the Peak-Trough Histogram Divergence – one Positive and one negative. A negative (or bearish) divergence forms when the histogram makes consecutive lower peaks and the MACD and price form consecutive higher peaks – price momentum is weakening in a similar way to the MACD divergence above. This can be seen in "The MACD Histogram Peak-Trough Negative Divergence" Chart . 

We have a histogram negative divergence indicating a possible price reversal to the bearish side. This price reversal is confirmed when the MACD crosses below the signal, which could be a trade entry point to short the USD against Japanese Yen (green circle). As with the MACD divergence the Histogram divergence indicates many false trade signals; so it’s used as part of an overall trading strategy where other trading tools are also utilised.

The MACD Histogram Peak-Trough Negative Divergence

A Positive histogram Divergence forms when the MACD and price form lower troughs and the histogram forms higher troughs – price momentum is turning away from the downside, to a bullish trend. This can be seen on the below chart “MACD Histogram Positive Divergence” where the lower well-defined troughs on the MACD are highlighted in Red and the Higher well-defined troughs in the histogram are highlighted in green. Notice MACD moved to a lower low in late May, but the histogram formed a higher low. It follows, if traders are using this divergence as an early warning signal before committing, a good entry level maybe Jun 6th or Jun 13th when the MACD crosses above the signal/trigger. Remember, this is a trend following indicator.

The MACD Peak-Trough Positive Divergence

The Slant divergence acts the same way as the peak-trough histogram divergence, but is minus the peaks and troughs. The Histogram in both the positive (bullish) and negative (bearish) divergences will slope towards the zero line indicating that price momentum is weakening and the price of the security is maybe about to turn. (Remember the histogram measures the distance between MACD and it’s 9-day moving average signal line. Momentum weakens as these lines converge).

In the below chart we've zoomed into a section of an IBM weekly chart following a primary up trend.  Within this primary up trend we can see two retracements.  Two positive histogram slant divergences have been highlighted, where the histogram diverges with the price and the MACD itself, indicating a momentum change.  If traders are using the histogram divergence as an early warning to possible momentum change then they will act on the buy signals where the MACD crosses the signal line (or where the histogram crosses zero).  These buy triggers are highlighted with green circles.  These two bullish divergences bring IBM out of retracement back on to the primary trend.



You can also see two negative divergences, one a peak-trough divergence (May-Jul 99) and one a possible slant divergence (Dec 98).  Trend traders will use these negative divergences to highlight where the primary trend maybe about to retrace and sell on the MACD-signal crossover.  Remember, other indicators should be used as part of your trading strategy.

The MACD Signal/Trigger Crossover

We touched upon the trading possibilities of the MACD price crossover in the section – “The Moving Average Convergence Divergence – MACD”. The signal crossover is the most common MACD signal - when the MACD crosses above the 9-day EMA (Exponential Moving Average) trigger line a buy (or exit the short) signal is created and when the MACD crosses below the signal line a sell/short signal is created. This is a great signal confirmation in itself, or just after a divergence and is generally traded with other indicators to get a clearer picture of where momentum is going. Again, this is better used in trending markets.

Below, we have an S&P 500 hourly chart in a primary up trend. We can see how traders utilise this indicator in a trading environment. On the 22nd the MACD (Blue line) crosses below the 9-day EMA trigger line. This indicates that traders should sell a long position. Indeed, momentum shifted to the downside until the MACD crossed above our trigger (white line) on the 27th. This crossover on the 27th is a buy signal where momentum reversed again to continue the primary trend. In effect the area between this sell signal and buy signal is a primary trend retracement.

The signal to exit this long position comes on the 5th when the blue MACD crosses under the white signal. Trend traders may sell here and await the retracement to follow it's course.  On the 7th we can see a criss-cross buy/sell signal. Buying when the MACD is above zero isn't an option for many trend traders, as the momentum change strength isn't generally with the trend trade. In fact we can see a negative divergence here, indicating a turn in momentum to the downside. This turn to the down side may have been a retracement or full blown trend reversal.  Other indicators need to be utilised to indicate whether the retracement is to continue,or not...  Use volume, Fibonacci retracements etc..and see where support and resistance are before trading.

MACD Signal Line Crossover

In the above example I've indicated that traders will sell on the retracements and buy on the continuation of the primary trend.  This may not be the case for all traders.  As part of a trading strategy, a long-term trader may be happy to keep his long position going into a retracement.  He/she may have a long position that only gets sold when long term trend lines are broken, or when previous support areas are lost.  By the end of this course, hopefully you'll be aware of many trading strategies and pick the one best for your needs.

If you find yourself in a situation where you see a buy signal crossover (MACD crosses above 9-day signal) above the zero line. or a sell signal crossover below the zero line, this indicates momentum is continuing and these signals are still valid.  Just be aware of any divergence that you see, indicating the possible change in momentum in the future.

The MACD Zero Line Crossover

As the name suggests the MACD zero line crossover highlights buy/short positions that may be profitable to a trader. When the MACD crosses the zero line it indicates that momentum has already reversed. Traders will employ other indicators into their trading strategy to try to determine whether it’s still a good trade to enter into.  To determine a strong trading signal The MACD will pass the zero line in a strong manner at a decent angle. This will also coincide with a strong histogram indicating good price momentum continuation. If the MACD crosses zero flatly or just above the zero line this indicates a range, which isn’t good to trade with The MACD.

In the Chart Below This strong signal is highlighted on the left where the MACD is also moving away from the 9-day trigger line. This strong MACD and rising histogram (the difference between MACD and trigger) shows good rising price momentum – a good buy signal. In this situation the trade sell signal occurs when the MACD crosses under the signal. As the MACD heads towards zero a “MACD zero line crossover” trade should be anticipated, but only if it crosses in a strong manner. We can see that when the MACD crosses back across zero and the histogram is strong – a good short signal. We can exit the trade at the next MACD/signal crossover.

In the below example out trading profits are indicated by the green and red trend lines. If we had traded the MACD signal/trigger crossover our profits would have been greater between the two trades (indicated by the grey trend lines). However, using the MACD zero line crossover is an extra confirmation that momentum has turned and strong, as well as triggering less false signals.  In effect the zero line crossover is another way of looking at the double moving average crossover, as when the MACD crosses zero, the 2 moving averages cross each other.

MACD zero line crossover

Changing The MACD Parameters

The standard setting for MACD is the difference between the 12 and 26-period EMAs. Chartists looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. MACD(5,35,5) is more sensitive than MACD(12,26,9) and might be better suited for weekly charts. Chartists looking for less sensitivity may consider lengthening the moving averages. A less sensitive MACD will still oscillate above/below zero, but the centerline crossovers and signal line crossovers will be less frequent.

To Sum Up

As you can see there are many ways of incorporating The MACD, in all of it's various forms, into your trend trending strategy. Find what's best for you and test it before setting yourself loose with a trading account. The MACD and MACD Histogram are great for spotting trend, identifying changes in trend & price momentum and establishing trading trigger entry & exit points.  Many trend following trading strategies will have MACD at their heart.  The MACD can't tell us if prices are overbought or oversold though and as the MACD is a derivative of price it's difficult to compare Momentum against different stocks, or against historical prices of the same market.  But it's unique in bringing together trend and momentum.  To compare other markets and historical prices we can use the Percentage Price Oscillator (PPO).  This is MACD's cousin and we'll talk about this next.

We can set the indicators price action sensitivity. The sensitivity of the indicator to price action determines how quickly the trader enters the move and how accurate these trading signals are. If the indicator is set to low sensitivity then you generate less false signals, but you may see the move too late, or not see it at all. With high sensitivity you are more likely to catch the move into the trade, but you may generate false trading signals.  For instance a swing trader (trading with a horizon of 4 to 5 days) may set the MACD to 3, 10, 16 once they've drill down to an hourly chart from a daily chart. Reducing the parameters of the moving averages will increase the sensitivity and highlight more signals - good and bad.  Good charting software will allow the parameters to be changed. 

Technical analysis is not an exact science and although these indicators can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

More...

    
>>>>>>> c0fd65f8ac5b5830dc3df1d307fcababd602b3a9
Comments