Is MACD the best or most versatile indicator?
I came across this article and wanted to share it with you guys hopefully it helps. I don’t have the link for it as I read the physical magazine but I’m sure it’s easily available. I will try my best to sum it up and give direct quotes where I can. It’s written by Bill Debuse who “has been engaged with the markets since 1959 and is presently a proprietary trader for a family foundation”
A link to the original online article
MACD: The trader’s indicator | Futures Magazine
“MACD is both a momentum and price-based oscillator and is one of the more reliable studies that we have. While it’s a lagging indicator, it works well in all time frames and with all stock or futures contracts. It is a highly interpretive probability signal that is based on the differences existing between three moving averages and it’s histogram.”
“While it’s slower than momentum indicators such as stochastic, RSI, or CCI, if I’m willing to sacrifice a little speed in exchange for safety, it’s good at keeping you on right side of the market”
"MACD is perhaps the best all-around study available. This author considers the MACD to be the best single oscillator available, and it’s valuable to learn its nuances inside and out. "
“Other than the price trend itself, MACD is the most accurate probability signal.The new trader would be wise to concentrate on really learning the MACD and its histogram before moving on to other oscillators.”
“Because MACD histograms produce so many probability signals, they also provide a broad interpretation of a moves synergy and are a great aid in keeping a trader on the right side of the market. For the knowledgeable trader, the histogram is a reliable probability signal that exists beyond the averages because it defines the synergy present in the move at hand”
“Bottom line is that the moving averages indicate the Trader’s actions, and the MACD histogram indicates the synergy present in the move”
“Appel likely configured the standard settings of 12,26,& 9 for use on longer time frames where they work quite well. However, default settings do not perform close to the oscillators potential when day trading. They simply do not produce the relationship between the histogram and the moving averages that is necessary for a shorter time frame. For shorter time frames, 34,55 & 12 work better.”
“… It is worth noting that a dependence on using envelopes as an exclusive trading methodology can whipsaw you quite badly in range-bound markets. Because envelopes are lagging indicators, using them will often have you executing later than the violation of the trend.”
“Nevertheless envelopes do produce an excellent confirming methodology. In fact, in actual practice, they have significant value in keeping you in a position rather than providing a probability signal to enter a new one.”
" Most traders who use the MACD only look at the crossing of these two averages to provide them with an execution signal. in other words, they treat them like a software generated envelope. Actually, the most effective use of the MACD is achievable by interpreting where the moving averages cross, their relationship to the histogram and where they enter or exit."
“The moving averages of the MACD are not so much a definitive signal as an insight into Trader activity: The MACD averages are indicative of the behavior of the traders who are presently buying and selling.”
“The consensus of most traders to use the MACD as a probability signal seems to be that the higher the moving averages cross, the stronger the potential decline. And if they cross low, any rally will be effective. However, experience indicates that the closer the moving averages cross the 0 crossover line relative to the histogram, the more sustainable the move is going to be. This is because the price action is indicating that the traders and the market’s synergism are in sync”
“The key to understanding the moving averages of the MACD is the proximity to which they exit the histogram of the previous move, cross and where they enter the new move’s histogram.The faster the fast average crosses the 0 crossover line and enters the new histogram, the more synergism a move possesses.That’s it; it’s that simple.”
“There are nuances understanding the fast average of MACD, but if understanding the relationship of the fast average to the histogram was all that a trader knew, he would never get hurt very badly. More importantly, he would tend to make money because he would nearly always be on the right side of the market.”
“Move completions are seldom confirmed until the slow average quits the histogram of the concluding move. The slow average of the MACD is the more deliberate of the two moving averages. It tends to move in agreement with the larger market and eliminates a lot of noise. Consequently, the slow average should be constantly watched because it will tell you about the general timbre of the larger market”
" it’s easy to overlook the smaller of the two averages, especially if we get caught up in the price action before us. Nevertheless, the resolution of any concluded move is seldom confirmed until the slow average actually quits the histogram. So never consider a concluding move as being completely finished until the slow average clearly exits the histogram. The fast and slow averages must cross after they exit the histogram to confirm the reversal… It should be noted that the closer than that the moving averages cross to the histogram not the 0 line, the more reliable the resolution is going to be."
" When the MACD averages cross high, yet close to the histogram, it is usually an argument for a strong move in a new direction.This is widely followed, and is what most traders who use the MACD watch. Usually this setup indicates a conservative entry."
" at the same time a crossing of the moving averages well removed from the preceding histogram is often accompanied by congestive price action. This is a graphic indication a significant number of the active Traders have held on to their belief that the concluding move should continue but the synergism of the larger market doesn’t agree."
“Anytime the moving averages do not promptly advance toward the crossover after exiting the histogram but instead just extend, they indicate a market that lacks direction that is not likely to produce a meaningful trade anytime soon.This congestion will continue until the fast average once again interact with a histogram.”
Whew! That’s a lot to digest and it’s only part 1! I’m curious to see what you guys think about the MACD is it one of your go-to indicators or do you find others that do the same thing as good or better?