Trend is a blog about global daily, weekly, monthly and yearly market trends in such financial markets as Forex, stocks and commodities as well as various day, swing and Forex trading strategies and ways to invest your money. In the blog I am going to share what happens in these markets on a daily basis. I hope you will enjoy my trend analysis. Welcome to my blog.
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Saturday, May 28, 2011
MACD is a technical indicator that was developed by Gerald Appel to be traded in financial markets. Although I am not a great lover of trading that is based on indicators, however, this and RSI indicators are my favorite ones. I like putting them on my charts and using them in my own way. Indicators are far from being perfect, so you will need to incorporate other indicators and technical tools to trade financial markets successfully. Standard macd consists of three ema’s (exponential moving averages), 12 day ema and 26 day ema and a signal line of 9 day ema.
How can these parameters be traded?
Faster ema crossing slower ema
As you may have noticed the most important averages in the indicator are 9 day ema (faster moving average) and 26 day ema (slower moving average). A sell signal is generated when a faster moving average crosses the slower moving average from above and a buy signal is generated when a faster moving average crosses the slower moving average from below.
I do not trust this method, for it gives a lot of false signals and it can only be applied profitable when a market moves smoothly and does not go sideways.
Crossing the centre line
When macd moves crosses the centre line from below we have a bullish crossover which would mean that you should go long in a given security and when the indicator crosses the centre line from above we have a bearish crossover which would mean that you should go short in a given security. Depending on which time frame you look and at which period of time you might see a lot of crossovers. If you look at 1 minute -1 hour charts you will see a lot of those as there are lots of daily market fluctuations that cause the indicator go below the waterline and then again back above the waterline.
That’s probably one of the best ways to use macd indicator. Of course, you have to remember that divergences work best when a market is in a range, not when it is trending. If you do not know what a divergence is I might remind you quickly. It is an imbalance between price and indicator. It means that price moves one way and an indicator moves in opposite direction. Let’s assume that a market is going down (as you may see in the chart of eur/gbp below). When a new lower low is made in price, it is not made in indicator. Indicator shows a higher low. It is a divergence. And we can interpret it that price is about to turn up sooner rather than later.
How I trade these divergences
Just because I see a divergence on 4 hour chart does not mean that I will immediately jump on a trade. I will firstly wait for a reversal pattern. It means that if the price was going down, it should not register lower low but should rally upwards and then after retracing to test previous bottom it has to fail to break it (look at the same example in eur/gbp). Then price come back to its most recent high. It would be good if it tested the level again, retraced and only then broke the resistance (ideal situation). It is very important to look around to see if there is any news coming that might cause a reversal (breakouts very often happen after important news releases).
So, look for these things in trading the indicator:
Price goes lower
macd goes higher
Price rallies upwards
When it comes back it fails to make a lower low
It comes back to resistance and breaks it.
method of trading the tool (The trend way)
All the indicators work for some time, none of the
indicators work all the time. Some indicators work under particular market
conditions and other indicators work under completely market conditions. Now, moving average convergence divergence is the indicator that is best used in swings that form in a range together
with appropriate support and resistance levels. When the price approaches
former resistance you wait for divergence and get ready to sell, when it
approaches support you wait for divergence to buy.
Unfortunately, these rules should be put aside while
trading in a well defined trend when prices rise or fall for a prolonged period
of time. The indicator will give you a truckload of false signals and you will lose more
than you make trading the indicator the traditional way. Look at the daily
chart of usd/jpy to see that. It indicates 4 specific cases where you had clear
price and indicator divergence (meaning prices should fall) and yet prices
continued rising, because market is in a strong bullish trend.
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So, what do you do when you have divergences in a
trend? You trade against them. You wait for a rally against a major trend
(correction or a counter trend rally) and when the rally is over you jump back
into a trend. How? I wait for bullish candles on various time frames if we have
a bearish counter trend rally in a major bullish trend. Look at the chart and
you will see that you could have bought after each counter trend move when
bullish candles appeared on a daily chart.
Alternatively, you can wait for 123 patterns on
smaller time frames (1 or 4 hour charts) and go long when point 2 is taken out.
Fundamental news releases can also be of great advantage for you to jump back
into the wagon and riding with the wind. In fact, when some tendency is
prevalent in the market you’d better forget all of your indicators and trade
with the trend. That is my best advice for you. When the move stalls and ranges
develop pick out your indicators and trade ranges by selling at the top of the
range (resistance) and buying at the bottom of the range (support).
Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.