5 Profitable MACD Stock Indicator Trading Strategies
Are you an indicator trader? If yes, then you will enjoy this comprehensive guide to one of the most widely used technical trading tools – the moving average convergence divergence (MACD).
In this tutorial, we testament cover 5 trading strategies using the indicator and how you can follow through these methodologies within your own trading arrangement.
Beyond the strategies, we wish explore if the MACD standard indicator is harmonious for day trading and how well the MACD inventory indicator stacks up against moving averages.
How To Pronounce "MACD"
There are two ways you can pronounce MACD.
The first base is away spelling come out of the closet each letter by saying M – A – C – D. The more popular option is to say "Mackintosh-D".
In order for the trading community to select you seriously, these are the sorts of things we have to get under one's skin rightist off the bat!
With that parenthesis, let's poke into the content.
Chapter 1: What is the MACD Stock Indicator?
The moving average convergence divergence reckoning is a lagging indicant in use to follow trends. It consists of two exponential function moving averages and a histogram.
Formula & Period
The default option values for the indicator are 12,26,9.
It is important to mention many traders disconcert the two lines in the indicator with simple wriggling averages. Remember, the lines are mathematical notation moving averages and therefore will have a greater chemical reaction to the to the highest degree recent Price movement, unlike the simple-minded moving average (SMA).
Thus, the MACD lines are depicted as follows: 12-period EMA and 26-period EMA.
If you neediness to learn more more or less the MACD stock indicator formula, go over the early part of this web log post[1] from Rayner over at TradingwithRyner.com.
This period can be changed to represent a slower or faster ahorse average (i.e. 5-minute, 60-second, daily).
Smooth Line of products and Initiation Air
The MACD calculation generates a smoothed line as depicted by the blue seam in the chart down the stairs.
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Succeeding raised is the red line in the chart, is most commonly referred to as the trigger describe.
The bolshy line is the 9-period EMA of the MACD ancestry.
This may sound a little confusing, but it's simply an mean of an average. This 9-EMA is then aforethought happening the chart with the MACD occupation. The trigger line then intersects with the MACD as monetary value prints happening the chart.
To learn Sir Thomas More near how to calculate the exponential moving average, please visit our article which goes into more detail.
The last component of the MACD is the histogram, which displays the difference between the two EMAs of the indicator (12 and 26). Hence, the histogram gives a positive apprais when the fast EMA (12) crosses above the slow EMA (26) and negative when the high-speed crosses below the slow.
A point to note is you will find out the MACD line oscillating above and downstairs zero. We testament discuss this in more detail tardive, but as a preview, the size of the histogram and whether the MACD stock indicator is supra or below zero speaks to the momentum of the security.
Chapter 2: Puritanical MACD Settings
Here is a chart of Amazon with default MACD stock indicator settings applied below the price action.
What would happen if we were to lower the settings on the touch off line to a shorter period?
As you can see from the revised AMZN graph below, the number of trade signals increased when we turn down the moving average period from 12,26,9 to 6,20,10.
Generally speaking, more trade signals is not always a good affair and can lead to overtrading.
On the flip slope, you may deficiency to consider increasing the trigger line period, so you can monitor longer-term trends.
Upright make certain the linguistic context matches the MACD parameters if you decide to play around with the default time periods. Other than, this can top down a slimy side of "analysis palsy."
Chapter 3: MACD Stock Index Trading Signals
Moving Average Cross
You have likely detected of the favourite golden cross as a predictor of major market changes. Well, when it comes to the MACD trading strategy we don't pauperism such a significant crossing to generate valid trade signals.
The almost consequential signal of the moving average convergence divergence is when the trigger line crosses the MACD up Oregon pour down. This gives us a signal that a trend power be emerging in the focus of the cross.
Context is everything, though. While the MACD may provide many grouchy signals, you do not want to act on every signal.
Have you ever heard of the quote "The Trend is Your Friend"?
Well, the MACD trading scheme is firmly rooted in this old trading bywor.
Zero Line Filter
As a general guideline, if the MACD is below the zero line, do non open any lengthened positions. Even when the initiation line crosses above the MACD line.
Conversely, if the MACD stock indicator is above the ordinal line, do not agaze any short positions. Symmetric when the trigger crosses below the MACD line.
To further illustrate this point, Lashkar-e-Taiba's go over a chart of Bitcoin.
Notification how the MACD inventory indicator stayed above the zero communication channel during the intact rally from the low 6000 range all the way supra 11,600.
No uncertainty many traders would have thought Bitcoin was elbow room overbought and would have potentially shorted every clock time the trigger lineage crossed below the MACD stock indicator. This approach would have tested disastrous as Bitcoin kept grinding high.
What would have unbroken you from being squeezed?
That's right, you should ignore deal signals when the MACD stock indicator is above zero.
Divergences
Does a divergence between the MACD and stock price run to trend reversals?
If you see damage profit-maximising and the MACD recording lower highs, then you have a bearish divergence.
Conversely, you bear a bullish divergence when the price is decreasing and the moving average overlap divergence is recording higher lows.
Out of the three basic rules identified in this chapter, this can be the most difficult to interpret. Not that it doesn't work, but you can receive multiple divergence signals ahead damage ultimately shifts.
Therefore, if your timing is somewhat forth, you could come obstructed out of a trade aright before price moves in the wanted direction.
This is a one-hour chart of Bitcoin. The selloff in Bitcoin was brutal. Arsenic the price of Bitcoin continuing lower, the MACD was making higher highs.
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Divergence may not lead to an immediate reversal, but if this pattern continues to repeat itself, a deepen is likely around the corner.
Moving Average Overbought/Oversold Conditions
Since the MACD stock indicator has no speed or lower trammel, traders do not often think of using the tool Eastern Samoa an overbought/oversold indicator.
However, to identify when a stock has entered the overbought/oversold district, you can look for a large distance betwixt the fast and slow lines of the indicator.
According to Charles Langford, Ph.D.., when the price increases between the short and long-life average, [2] "the price slue is solid and continues in the same counselling."
The easiest way to identify this divergence is by looking at the to of the histogram on the chart.
MACD Extension
This divergence can lead to acutely rallies counter to the preceding trend. These signals are visible on the chart as the scotch made by the gun trigger line will look like a teacup organization along the indicator.
Again, the MACD stock index number has no limits, so you need to apply a longer look-back period to gauge if the security is overbought Beaver State oversold.
To illustrate this luff, let's take a flavor at the S&P 500 E-mini Futures contract.
We've selected the S&P 500 E-mini reduce because the security is less volatile and has homogenous price moves. This will help reduce the extreme readings of the MACD.
Next, we looked for levels above and at a lower place the zero stemma where the histogram would retreat in the opposite direction. This is where exploitation the MACD trading strategy as an overbought/oversold indicator gets slippery.
At any given point, a security can have an explosive move and what historically was an extreme Reading, no more matters.
If you decide to use the MACD trading scheme as a means to gauge overbought/oversold areas, you must adhere to strict boodle. Again, the MACD is a impulse indicator and not an oscillator – there is nary "stop button" at one time things get going.
To find more information on stops, you can check out this post on how to use the parabolical SAR to manage trades. The indicator's sole purpose is to provide stop auspices when in a trade.
Chapter 4: 5 Trading Strategies Using the MACD:
Now that we understand the basics of the MACD stock indicator, let's dive into five simple strategies you can test out. We've decided to take the approach of using less popular indicators for these strategies to see if we can uncover few hidden gems.
Sense free-soil to stress test each of these strategies to see which one works best with your trading style. For all of these entries, we recommend you habit a stop limit put to ensure you produce the unexcelled pricing happening the execution.
#1 – MACD + Relative Vigor Index finger
Why the Relative Vigor Forefinger (RVI)? The RVI is an oscillator that correlates a security's conclusion price to its price roll.
The calculation is a number complicated. but to simplify things, think of the RVI as a second cousin of the Stochastic Oscillator. To learn more about the Stochastic Oscillator, please visit this article.
By adding an oscillator in the mix, it can render greater context of overbought/oversold conditions. This adds context to the MACD stock indicator which confirms if the impulse or strength of the trend is intact.
The canonic idea seat combining these two tools is to match crossovers.
In other row, if one of the indicators has a cross, we wait for a cross in the duplicate commission by the other index. When this happens, we buy or deal out the equity.
To manage the position, we hold until the moving average overlap divergence gives United States a signal to confining the trade.
The below image illustrates this scheme:
This is the 60-minute chart of Citigroup. It shows two short-dated and i long positions. Each were opened after a crossover from the MACD and the RVI.
These crossovers are highlighted with the green circles. Also observe the cherry circles connected the MACD highlight where the position should have been closed.
From these three positions, we would have gained a profit of $3.86 per share.
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#2 – MACD + Money Flow Index number
Next up, the money flow index (MFI). The money flow index is another oscillator, but this oscillator focuses on some price and intensity.
The MFI will generate fewer buy and sell signals compared to otherwise oscillators because the money flow indicator requires both price movement and surges in volume to produce extreme readings.
In this scheme, we will aggregate the crossover of the MACD stock indicator with overbought/oversold signals produced by the money run over index (MFI).
When the MFI gives us a signal for an overbought stock, we wait for a bearish spoil of the MACD lines. If this happens, we go curtly.
Similarly, it acts the same way in the opposite direction. An oversold MFI reading and a bullish traverse of the MACD lines generates a long-wool signalize.
Therefore, we halt with our position until the indicate line of the MACD breaks the set off line in the opposite direction. The on a lower floor image illustrates this strategy:
This is the 10-minute chart of Bank of America.
The prototypical green circle highlights the moment when the MFI is signaling that BAC is oversold. 30 minutes later, the MACD stock indicator has a bullish signal and we open our long position at the green circle highlighted happening the MACD.
We hold our position until the MACD lines interbreed in a pessimistic direction as shown away the loss circle on the MACD. This position would have brought us profits of 60 cents per share for well-nig 6 hours of work.
#3 – MACD + TEMA
Let's turn our care at once to the Triple Exponential Moving Average (TEMA) indicator!
We decided to construe with the TEMA because as traders we love validation. What punter joyride for this than an indicator that smooths out 3 exponential moving averages?
We also went with 50-period soaring averages to capture the larger moves. To that end, we reduce the number of trade signals provided with this strategy.
Trade signals are generated when the profligate line crosses the MACD stock indicator and the security price breaks through with the TEMA.
We will exit our positions whenever we find contrary signals from some indicators.
Although the TEMA potty produce more signals in a sudden market, we wish use the moving average convergence divergence to filter these down to the ones with the highest probability of success.
The simulacrum below gives an example of a flourishing MACD + TEMA signal:
This is the 10-minute graph of Twitter.
In the first green rophy, we have the moment when the price switches above the 50-period of time TEMA. The second green circle shows when the bullish TEMA point is confirmed aside the MACD stock indicator. This is when we open our long put up.
The price increases and in about 5 hours we pay off our prototypic closing signalise from the MACD stock indicator. 20 minutes ulterior, the price of Twitter breaks the 50-period TEMA in a pessimistic centering and we close our long position.
This trade would have brought us a total profit of 75 cents per plowshare.
To learn more about the TEMA indicator, delight read this clause.
#4 – MACD + TRIX indicator
Building upon the concept of a triple exponential moving average and impulse, we introduce to you the TRIX index number.
The TRIX is a overnice pairing with the MACD stock indicator because information technology is an oscillator, simply more importantly, it is a momentum oscillator. To learn more about the TRIX, please read this article.
This time, we are going to match crossovers of the moving mean converging divergence normal and when the TRIX index crosses the zero level. When we match these two signals, we testament enter the market and expect the stock price to start trending.
Exits
This strategy gives us cardinal options for exiting the market:
- Exiting the market when the MACD stock indicator makes a cross in the opposite direction
This is the tighter and much secure give-up the ghost strategy. We exit the grocery store right after the actuate telephone line breaks the MACD in the opposite direction.
- Exiting the commercialize after the MACD origin indicant makes a mark, followed by the TRIX breaking the zero line
This is a riskier exit strategy. If there is a significant change in vogue, we are in our position until the zero melodic line of the TRIX is broken. Since the TRIX is a lagging indicant, information technology might train a while for that to happen.
At the finish of the day, your trading style wish determine which option best meets your requirements.
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Here is an example of these ii scenarios:
This is the 30-minute chart of eBay.
The kickoff special K circle shows our outset long signal, which comes from the MACD stock index number. The 2d green circle highlights when the TRIX breaks zero in and we enter a long position.
The two red circles show the contrary signals from each indicator. Note in the first cause, the moving average convergence divergence gives United States the option for an embryonic exit, while in the endorsement case, the TRIX keeps us in our position.
Using the first exit strategy, we would have generated a earnings of 50 cents per share. The alternate approach would have yielded 75 cents per contribution.
#5 – MACD + Impressive Oscillator
This scheme requires the assistance of the well-known Awesome Oscillator (AO).
For those strange with the awesome oscillator, it is obviously an oscillator. But it's an oscillator without boundaries. It's simply the difference of a 5-period simple moving intermediate and a 34-flow simple touching average.
To learn more about the awesome oscillator, please visit this article.
We will both enter and kick the bucket the market alone when we receive a indicate from the MACD stock indicant, unchangeable by a signal from the AO.
The challenging part of this strategy is that ofttimes we will receive single one signal for entrance or exit, simply not a confirming signalize. Have a tone at the illustration below:
This is the 60-hour chart of Boeing. The two green circles give us the signals we need to open a pole-handled post. Aft releas long, the awesome oscillator all of a sudden gives us a adverse signal.
Sooner or later, the moving average convergence divergence does not bring on a bearish crossover, so we stay in our long position.
The first loss circle highlights when the MACD has a bearish signal. The minute red circle highlights the bearish bespeak generated past the AO. Thus, we close our sesquipedalian position.
Furthermore, notice that during our long position, the moving average convergence discrepancy gives us a few bearish signals. Yet, we hold the long position since the AO is jolly strong.
This long position would get brought United States of America a profits of $6.18 per share.
Chapter 5: Is the MACD Trading Scheme reserve for Day Trading?
The simple solution is yes; the MACD trading strategy can be used to day deal any security.
The MACD stock indicator is supported whatever time compose you are trading. Thus, it's strength or lack thereof has nothing to do with intraday trading versus daily charts.
The one thing you should be concerned astir is the level of volatility a stock or futures contract exhibits. The greater the volatility, the less likely the MACD stock indicator or any other indicant, for that matter, will accurately forecast price movement.
Chapter 6: MACD vs. MA (Bonus Strategy)
How do these two indicators congratulate one another?
You bathroom use the squirming average as a validation tool for the toll action in conjunction with the MACD index number.
In the below trading example of the S&P500 E-mini futures, notification how the contract performs as it approaches the 20-flow moving average.
Simply wait for the security to test the 20-period restless normal and and so wait for a cross of the trigger line above the MACD.
This basic scheme volition allow you to bargain into the pullbacks of a security that has strong upward impulse.
Chapter 7: Best MACD Trading Strategy Books
We had a tough time determination the best MACD book on Amazon. Mos were self-published. There was atomic number 102 obvious MACD trading strategy Evangelist like John Bollinger with Bollinger Bands.
So if you are looking to dominate the quad with a saintly book – like a sho is the time.
However, hither are a some you might deal:
The best information on MACD trading strategy still appears in chapters in popular specialised psychoanalysis books, Beaver State via online resources like the awesome article you are Reading now. At any pace, I desire to be atomic number 3 helpful as conceivable, so check out the below carousel which has 10 MACD trading strategy books you stool run down for yourself.
To view more entropy about these books, delight feel out the outside links in the external resources[3-8] section at the end of the article.
Chapter 8: Using MACD to Foretell Major Drift Changes
Any time frame you use, you will want to take it up 3 levels to zoom out far enough to see the larger trends. For example, if you are using a 5-minute chart, you volition want to skip over capable the 15-minute view.
It is extremely difficult to predict leading market shifts. For example, there suffer been bears calling for the collapse of the current bull run off in US equities for nearly each year since the market began.
With that in mind, net ball's look at the sell-off in early 2016 with the S&P500 E-mini Futures.
The E-mini had a prissy W tail formation in 2016. Notice how the MACD refused to go lower, while the price was retesting extreme levels. This divergence ultimately resulted in the closing two years of another major leg up of this Bull Run.
The key to prediction market shifts is finding extreme historic readings in the MACD, but retrieve past times performance is just a guide, not an exact science.
For more information on calling major marketplace bottoms with the MACD stock indicator, check out this article published by the Mathematics department from Korea University.[9]
Within the study, the authors go through painstaking detail of how they optimized the MACD stock indicator to better predict stock price trends.
In summary, the study further illustrates the hypothesis of how, with plenty analysis, you can use the MACD shopworn indicator for large analysis of the market.
Chapter 9: Recommendations
- We prefer combining the MACD stock indicant with the Relative Vigor Forefinger operating theatre with the Awesome Oscillator may .
- The RVI and the AO do not diverge greatly from the moving average convergence.
- RVI and AO are less likely to confuse you, yet provide the necessary confirmation to embark, hold Beaver State exit a position.
- The TEMA likewise waterfall in this category, but I consider the TEMA could nonplus you unstylish of the market too early and you could miss extra net.
- Regrettably, we find the MACD + TRIX indicator scheme too risky. Notwithstandin, it could atomic number 4 suitable for traders with a greater appetite for risk.
- Complete things considered, the Money Flow index + MACD generates many spurious signals, which we intelligibly want to avoid.
Independent of these 5 strategies, our physical favorite is the bonus strategy, which combines the MACD trading strategy with the 20-geological period moving average.
Conclusion
We promise you've found the information therein guide helpful. Indicators and strategies can constitute a bit daunting when first starting out as a trader. Yet, with the proper education and experience, they can be subservient tools to augment our trading.
As with any strategy, we recommend practicing with a simulator ahead putting real money to work. If you don't have a subset of trades and a known probability of achiever for for each one strategy, you're just gaming.
Here's to good fills and trading achiever! Stay in touch!
External References
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- Dr. Langford. (2010). The MACD Indicator [Blog post]. Desjardins – Online Brokerage
- Raynor Teo. (2019). The Complete Pathfinder to MACD Indicator. tradingwithraynor.com
- Patterson, Jackie. ( 2014).' The true Well-nig MACD, What Didn't Oeuvre, You bet to Ward of Mistakes Even Experts Make (Beat The Crash)'. Own Mountain Trading Company
- Appel, Gerald. (2008). 'Understanding MACD (Moving Average Intersection Divergence)'. Trader Press Inc.
- Wilhelm, John. (2014). 'MACD/Variance Trading: How to Build a Profitable Trading System Using Moving Average Converging-Divergence'. Zantrio, LLC.
- Abraham, Andrew. (2013) MACD Trading Indicator – Follow the Trend & Where Trends Possibly Start and Stop (Trend Following Mentor).
- Wheatley, Dale. (2009). MACD Paycheck: Simple Trading Laws for Extraordinary Wealth 1st Edition [DVD-ROM]. Wiley Trading Video
- Sincere, Michael. (2011) 'All About Market Indicators'. John McGraw Hill
- Wang, Jian & Kim, Junseok. (2018). Predicting Stock Price Trend Using MACD Optimized by Historical Volatility [Study]. Korea University
- External Data link – create the moving average convergence divergence formula in excel. This one is for all you bookworms that need to see exactly how the indicator works.
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Source: https://tradingsim.com/blog/macd/
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