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Friday, July 13, 2012

Trading moving average convergence divergence indicator

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.

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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.