How do you use MACD?

Beginner Questions
1

Is this MACD indicator do any good? How do you use them? So far, I only stick to SNR and SMA.

2

Opinions differ.

I don’t use it, myself (but I used to). My view is that as oscillators based on moving averages go, it’s actually one of the rather better, rather more helpful ones, if clearly understood and appropriately used. But that’s a [I][U]big[/U][/I] “if”, as MACD is [B]very[/B] widely misunderstood and (in my opinion) misused.

Different people use them in different ways.

A very good source of information about them is the book [I]Trading for a Living[/I] (recently re-published under the title [I]The New Trading for a Living[/I]) by Dr. Alexander Elder, an originally Russian psychiatrist in New York, who explains quite well how human behaviour causes price movements in markets.

His view (and mine) is that the MACD is only really useful for monitoring divergences between the MACD histogram and the price. These divergences he considers to be among the very strongest and most reliable trading signals that an indicator can ever give you, and I think he’s right.

Unfortunately, however, learning to appreciate and interpret them is certainly “on the difficult side”, as these things go. And much internet information on the subject - especially forum information - is pretty misguided, so it isn’t easy.

The difficulties are compounded by the fact that in this forum, many traders use a platform called “MT4”, which has always displayed the MACD incorrectly and in a particularly unhelpful way.

[U]Three key things to appreciate about the MACD[/U]:

  1. The MACD comprises [U]two[/U] lines: the first (sometimes called “fast line” or “MACD line”) represents [I]the difference between two specified moving averages of different periodicities[/I]; the second (sometimes called the “slow line” or “signal line”) is simply a moving average [I]of the first line[/I] (in other words it’s a moving average of the differences between two other specified moving averages).

  2. There’s also an additional (and good) option called an “MACD Histogram”, which displays the difference between [I][U]the MACD’s first line and its second line[/U][/I] in the form of a histogram, either with or without the two lines themselves also being displayed on the same chart. Note that the histogram is [B][U]not[/U][/B] displaying “the difference between two moving averages” (as is quite widely but entirely mistakenly believed, and as is wrongly stated in many threads in this forum).

  3. There’s probably no point in trying to use it for forex trading from its original, old-fashioned settings. These were based on daily charts for stock trading, when there were 6 trading days in a week and therefore about 26 in a month, to show a comparison between trends over two weeks (12 days) and a month (26 days). This has nothing to do with forex at all, and especially nothing to do with anything faster than daily charts. The standard “French settings”, for institutional forex trading, as used at CrĂ©dit Agricole and formerly at CrĂ©dit Lyonnais, are 9/19/6. I used to use it on fast, intraday charts with settings of 16/32/12. Linda Bradford Raschke has published a trading system based on using fast charts with settings of 3/10/16. These facts might help you to appreciate that there’s a lot of flexibility in “how you set it up” according to “what you want it to do”! :wink:

I would stay well away from the page in the School, here, which purports to explain MACD - decidedly [I]not [/I]one of the site’s better or more helpful pages, in my opinion (I just hope nobody will object to my mentioning this! :8: ).

3

Yes
 If I need conformation on my setup then I use MACD. For example, from what I see on the weekly chart of EUR/GBP there is a clear channel breakdown. And the MACD histogram is my confirmation. Do you see that it has recently turned down ? Right now it is in Wednesday in the middle of the week but at the end of the week we will know for sure if the histogram confirms my trade idea.

EUR GBP.jpg700×459 46.9 KB

4

MACD is one the most used indicators, but still that doesn’t mean that a trader should relay only on that indicator. Every indicator should be used in a combination with other indicators.

5

I disagree Rambo35. Yes the MACD is one of the most popular indicators. However, Both how you chose to use the indicator, and how many indicators you use are completely up to the trader and the strategy. There is no hard and fast rule that you HAVE to use indicators in combination with other indicators. Even though most traders do. But most traders are losers as well :stuck_out_tongue:

6

I don’t understand your disagreement. As you can see I am saying that every indicator [B]should be[/B] and not [B]must be[/B] used in combination with other indicators.

7

Well, that’s the sentence that Jayce disagreed with.

Please excuse my mentioning that I also disagree with it, Rambo.

My perspective is that the [I]fewer[/I] the number of indicators you use, the better, so if you’re using one at all, in principle it’s better not to combine it with another, but to learn price action and combine it with that instead (which is actually what I did when I was using the MACD, before realising that (a) it was much more complicated than I’d at first thought and (b) that I didn’t need it anyway).

I think the idea that because indicators aren’t completely reliable, they can somehow be “improved” by “confirming” their signals with those of other indicators is one big fallacy. They’re all derived from previous prices, anyway.

I also think that for aspiring traders, using multiple indicator combinations is not only a bad thing to do, for the most part, but also a huge distraction from the trading education process, and a misdirected effort.

In my opinion, the people who one finds saying they have ten years’ experience of forex trading, and disclose that they’re trading from multiple indicator combinations to try to “confirm” their trading signals, have pretty often had something more like the same one month’s experience 120 times over, rather than anything I’d call ten years’ experience, myself, and very few of them are making a living at all.

I concede that there are apparently a very few exceptions to this, though. :wink:

8

I am using the MACD Indicator for my trades from the last 2 years and i can say that the signals we can get from using this are good only if you are not combining it with the other Indicators like the Bollinger bands :wink:

9

[B]"[/B]Let’s take a trip off the beaten path. We’ll administer some necessary medicine to a revered technical indicator - the moving average convergence divergence (MACD). Enough articles have been written about the MACD to depopulate half the world’s rain forests, but little has been said about the downsides of using this very popular tool. In short, the MACD doesn’t work as well as some say it does. It’s a glorified moving average, and it’s weak at forecasting price direction. In this article we’ll cover the controversial perspective of those who spurn the use of this prevalent indicator and what can be used in its place
"

Read more: Candle Sheds More Light Than The MACD | Investopedia Candle Sheds More Light Than The MACD | Investopedia

10

I love its divergence, though I didn’t used this in my trading a lot as I’ve switched to price action trading and dropped all the indicators.