Moving average convergence
divergence indicator or simply macd
is one of the best technical indicators that are available to all traders. However,
the traditional approach and way of using it has become somewhat obsolete and
you will have too many bad trades trading the traditional way. Most often it
means trading crossovers from below up (above zero line) or from above down
(below zero line). Another popular usage of the indicator is to trade
divergences. This may be still be a good way to trade, but one has to identify
the best trading conditions for trading divergences in financial markets.
It has become rather risky
to trade macd divergences in a trend environment. When securities go in one
direction (trending) almost all
indicators start giving false signals and you should not follow those. If the
market is in a state of a range there are fewer false signals and you can trust
more macd divergences and trade accordingly (traditionally).
So, if you see that there is
a prevailing tendency in the market ignore all the technical indicators, no matter how good they are and simply follow
the price action or trade against the signals by doing the opposite of what
they tell you. How is that? If in a moving upward market (trending) you see
that macd indicator is showing
divergence (giving signal about a coming reversal) you should ignore it, or
wait for the security to go down, form a reversal pattern (such as 123 or
inverted head and shoulders, or some candle pattern) and go long again in the
direction of the prevailing trend. In this case you would be trading against divergences.
However, let us imagine that
a security is in a range (and in most cases it will be as securities stay in
ranges 80 to 90 percent of time of a year)! This means we are going to see a
lot of sideways action as well as moving from one end of range to another. Then
overbought and oversold levels identified by macd divergences work very well and seeing those on your charts
help you to trade them accordingly and make profit.
I genuinely believe that one
can trade without any indicators, relying purely on price action and be a
profitable trader. However, beginners sometimes need various tools of technical
analysis to help them see what is going on in the market and what to do with
the information that they have. macd will definitely help you to see that.
Hope the post was useful.
See also:
Disclaimer
Trading
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.