How to use MACD

love a good love-hate relationship, and that’s what I’ve got with technical indicators Technical indicators are those fancy computerized studies that you frequently see at the bottom of price charts that are supposed to tell you what the market is going to do next (as if they really could). The most common studies include MACD, Stochastics, RSI and ADX, just to name a few.

The No.1 (and Only) Reason To Hate Technical Indicators
I often hate technical studies because they divert my attention from what’s most important – PRICE.

Have you ever been to a magic show? Isn’t it amazing how magicians pull rabbits out of hats and make all those things disappear? Of course, the “amazing” is only possible because you’re looking at one hand when you should be watching the other. Magicians succeed at performing their tricks to the extent that they succeed at diverting your attention.

That’s why I hate technical indicators; they dived my attention the same way magicians do Nevertheless, I have found a way to live with them, and I do use them Here’s how: Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups.

Three Reasons To Learn To Love Technical Indicators
Out of the hundreds of technical indicators I have worked with over the years, my favorite study is MACD (an acronym for Moving Average Convergence-Divergence) MACD, which was developed by Gerald Appel, uses two exponential moving averages (12-period and 26-period). The difference between these two moving averages is the MACD line. The trigger or Signal line is a 9-period exponential moving average of the MACD line (usually seen as 12/26/9…so don’t misinterpret it as a date) Even though the standard settings for MACD are 12/26/9, I like to use 12/25/9 (it’s just me being different). An example of MACD is shown in Figure 10-1 (Coffee).

The simplest trading rule for MACD is to buy when the Signal line (the thin line) crosses above the MACD line (the thick line), and sell when the Signal line crosses below the MACD line Some charting systems (like Genesis or CQG) may refer to the Signal line as MACD and the MACD line as MACDA Figure 10-2 (Coffee) highlights the buy-and-sell signals generated Item this very basic interpretation.

Although many people use MACD this way, I choose not to, primarily because MACD is a t rend-following or momentum indicator. An indicator that follows trends in a sideways market (which some say is the state of markets 80% of time) will get you killed For that reason, I like to locus on different information that I’ve observed and named: Hooks, Slingshots and Zero-Line Reversals Once I explain these, you’ll understand why I’ve learned to love technical indicators.

Hooks
A Hook occurs when the Signal line penetrates, or attempts to penetrate, the MACD line and then reverses at the last moment. An example era Hook is illustrated in Figure 10-3 (Coffee).

like Hooks because they fit my personality as a trader. As I have mentioned before. I like to buy pullbacks in uptrends and sell bounces in downtrends. And Hooks do just that – they identify countertrend moves within trending markets.

In addition to identifying potential trade setups, you can also use Hooks as confirmation. Rather than entering a position on a cross-over between the Signal line and MACD line, wait for a Hook to occur to provide confirmation that a trend change has indeed occurred Doing so increases your confidence in the signal, because now you have two pieces of information in agreement.

Figure 10-4 (Live Cattle) illustrates exactly what I want this indicator to do: alert me to the possibility of rejoining the trend In Figure 10-5 (Soybeans), I highlight two instances where the Hook technique worked and two where it didn’t.

But is it really fair to say that the signal didn’t work? Probably not, because a Hook should really just be a big red flag, saying that the larger trend may be ready to resume. It’s not a trading system that I blindly follow All I’m looking for is a heads-up that the larger trend is possibly resuming. From that point on, I am comfortable making my own trading decisions. If you use it simply as an alert mechanism, it does work 100% of the time.

Slingshots
Another pattern I look for when using MACD is called a Slingshot. To get a mental picture of this indicator pattern, think the opposite of divergence. Divergence occurs when prices move in one direction (up or down) and an indicator based on those prices moves in the opposite direction.

A bullish Slingshot occurs when the current swing low is above a previous swing low (swing lows or highs are simply previous extremes in price), while the corresponding readings in MACD are just the opposite Notice in Figure 10-6 (Sugar) how the May low was above the late March swing low However, in May, the MACD reading tell below the level that occurred in March. This is a bullish Slingshot, which usually identifies a market that is about to make a sizable move to the upside (which Sugar did).

A bearish Slingshot is just the opposite: Prices make a lower swing high than the previous swing high, but the corresponding extreme in MACD is above the previous extreme Figure 10-7 (Soybeans) shows an example era bearish Slingshot.

Zero-Line Reversals
The final trade setup that MACD provides me with is something I call a Zero-Line Reversal (ZLR). A Zero-Line Reversal occurs when either the Signal line or the MACD line Falls (or rallies) to near zero, and then reverses It’s similar in concept to the hook technique described above The difference is that instead of looking for the Signal line to reverse near the MACD line, you’re looking for reversals in either the Signal line or the MACD line near zero. Let’s look at some examples of Zero-Line Reversals and I’m sure you’ll see what I mean. In Figure 10-8 (Sugar), you can see two Zero-Line Reversals Each time, MACD reversed above the zero-line, which means they were both bullish signals When a Zero-Line Reversal occurs from below, it’s bearish. Figure 10-9 (Soybeans) shows an example of one bullish ZLR from above, and three bearish reversals from below. If you recall what happened with Soybeans in September 2005, the bearish ZLR that occurred early that month was part of our bearish Slingshot from Figure 10-7 These combined signals were a great indication that the August advance was merely a correction within the larger sell-off that began in April That meant that lower prices were forthcoming, as forecast in tile August and September issues of Monthly Futures Junctures.

So there you have it, a quick rundown on how I use MACD to alert me to potential trading opportunities (which I love) Rather than using MACD as a mechanical buy-sell system or using it to identify strength or weakness in a market, I use MACD to help me spot trades And the Hook, Sling-shot and Zero-Line Reversal are just a few trade setups that MACD of offers.

Article Source: elliottwave.com

How to use MACD with Histogram

#1

How indicator MACD was good, there is this way to check while doing currency trading . This technics refers to “Histogram MACD”.

The histogram MACD gives earlier preventions of changes onchange in an occuring a trend and strongly increases value of it on the charts. As the histogram shows signals of crossing MACD (it is a little in another way), at its use it is lost nothing. The way of creation of faster signals of action is got in day trading.

The histogram simply places distinction between line MACD and the Alarm line. This refers to as the histogram for buy or sell moments because of a vertical the columns used to show distinction between two Lines. This is most effecyive when used along with EMA or RSI.

Histogram MACD changes above and below zero Lines. When value of the histogram is higher than a zero line, it is simple Means, that two lines MACD have the bull market (MACD aboveAlarm line). While value of the histogram is above well The left line, signals MACD still bull. So its a good time to place forex trade using any currency pair..Remember the technical analysis can be used for placing trade in any currency pair.

When a fast line MACD it is crossed below slow alarm line (a signal of sale), value of the histogram falls below its zero Lines. Crossings are higher also than below zero line the histogram – Yes coincide with the bull and bear crossings two lines MACD. As it has been specified earlier, it is the second way on behind the same forex day trading system. Here advantages are visible Histograms.

Remember, stick to the same set of indicators when using a system..If you are using candlesticks, use candlesticks. If RSI or EMA, then use it.

#2

If the histogram is above a zero line (bull), butStarts to fall to a zero line, it tells us, that (or the spread) between two lines MACD begins the attitude To weaken currency trading analysis.

Remember, whether that the histogram measures distinction between MACD or even RSI. Value of the histogram with plus or a minus (is higherOr to below zero line) tells us to enter the trade or exit the trade, whether lines MACD are Bull or Sell market. The direction of the histogram speaks us,Gets or loses the moment this bull or bear attitude.

Let’s look at the market at the bottom trend. The histogram is below zero that means, that line MACD is belowIts alarm line. In other words, the action is in bottomTrend. Some time the histogram also falls. UnexpectedlyLines of the histogram start to rise to a zero line. Though day trading system MACD is still negative (noSignal of purchase), the bottom trend loses the moment Many traders inSuch case will close short positions. The valid trading signal in currency charts for opening a long position does not occur before movement

Histograms are higher than its zero line Model has the opposite at the top trend. During the top trend the positive histogram bull propensity MACD on RSI or EMA. Some time the histogram will beAbove its zero line also will continue to raise In any point, However, the histogram will start to fall to the zero line Traders Will frequently use downturn of the histogram as early Signal to start to remove the profit of the raising action. The signal of sale is not given, however, while the histogram will not fall below zero line. This is valid signal for placing the forex trade.