As suggested, you can try shortening the MACD period settings to get a faster response: A stop loss order should be placed below the bottom created at the moment of the reversal , as shown on the image. As author, you may use with HikenAshi chart. These are two separate exit signals, which unfortunately come a bit late.
The MACD bars histogram you see on the below chart, reflect the difference of the main and signal lines. On the price chart, you see the main and signal lines. The red one is the main line and the green line is the signal line. As you see, wherever the distance of these two moving lines is bigger, the MACD bars will become longer too, and wherever these two lines cross, the length of the related MACD bar is zero follow the black arrows.
As you see, when there is an upward movement and pressure the market is bullish , MACD histograms go up and change to blue and when there is a downward pressure and movement the market is bearish , they go down and change the color to red. MACD bars form highs and lows. When we have an uptrend, they form higher lows and when we have a downtrend, they form lower highs and when the bars go under the zero level, they form lower lows:. Of course, if you know about the Elliott Waves and also the cycles, you will not take any positions against the trend, even if MACD is not on the chart, but as knowing the cycles and Elliott Waves is very difficult, you can use MACD to stay away from going against the trend.
Please look at the below reversal signal. A candlestick is formed completely out of the Bollinger Bands and then three Bearish candlesticks form that are all reversal signals. But, the second sell signal the yellow zone , looks like a good short trade setup.
So going against MACD is risky. Of course, the above signal formed by the candlesticks are not strong enough. That is why the price did not reverse and kept on going up. As novice traders are unable to distinguish the strong candlestick trade setups, having MACD can be a big help not to go against the trend based on the weak trade setups. MACD also indicates whether the market is overbought or oversold. When it is overbought, it is riskier to go long and when it is oversold, it is riskier to go short.
When the market is overbought, Bulls buyers can start collecting their profit they sell at any time, and so the price may go down, and when the market is oversold, Bears can start buying at any time, and so the price may go up.
Of course, the candlesticks also tell you if the market is overbought or oversold, but MACD is also a big help. You are a trend trader.
You have an uptrend here below. You see some reversal signals, but you wait for a continuation signal to go long. A strong Bullish candlestick forms the last one on the below chart and at the same time the last MACD bar changes its color and shows an upward pressure.
Of course it can go much higher, but we never know:. This position goes up only for one more candlestick and then goes down and triggers your stop loss:. MACD trading is so common among the Forex traders.
They just wait for a fresh MACD movement for a few bars and then they enter. MACD is really good for trend trading. MACD has to be used as a confirmation only. The main indicator is the price.
If you use MACD as a confirmation for support and resistance breakout, it will be a big help. Look at the below image. There is a trend line with valid and visible support line. You are waiting for the support breakout to go short. It is above the zero level too. So you go short at the open of the next candlestick, set your stop loss above the high price of the last candlestick and your target will be the next support level. It goes down and hits the target very easily. Obviously, it is a new chance to take another short position, but look at the MACD and its difference with the previous position.
With the previous position, MACD started going down while it was way above the zero level. It means, you would go short while market has been overbought which is a good decision. In this position below , not only MACD is not above the zero level, but it has already started going up and making higher lows. So the market is oversold and your sell signal is not fresh. If you use the traditional MACD, then the same divergence can form with the main and signal line.
The rule says, the price will finally follow the MACD direction and will go down. However, the problem is you never know when the price will start following the MACD direction. So, if you rush and take a short position right when you see the MACD Divergence, it may keep on going up for several more candlesticks.
MACD Divergence can be seen at the end of uptrends. What does it mean? The market can collapse at any time. Fear is stronger than greed and when markets go down, fear is the dominant emotion. MACD Convergence forms when price goes down and forms lower highs or lower lows, but at the same time MACD bars go up and form higher highs or higher lows. The rule says, the price will finally change the direction and will follow MACD.
MACD Convergence can be seen at the end of downtrends. It means if you are a trend trader, you should not go short when you see that MACD Convergence is formed.
I have been in the markets for over 12 years, but still your detailed approach helps a lot in fine tuning my strategy from my experience macd is one of the best indicators. I came to an idea to study macd after a trader i knew from a big bank few years ago was making millions dollars a year using Elliott waves with macd.
Thanks Dr Chris the concept is broadly explained. I have a question how possible is it to use the crossing of the main and signal line in determining the trend movement.
Does it have any effect? I notice the predominant upward presense of the Red line which is the main line in an upward trend? After all, our top priority in trading is being able to find a trend, because that is where the most money is made.
The two lines that are drawn are NOT moving averages of the price. In our example above, the faster moving average is the moving average of the difference between the 12 and period moving averages. The slower moving average plots the average of the previous MACD line. Once again, from our example above, this would be a 9-period moving average. This means that we are taking the average of the last 9 periods of the faster MACD line and plotting it as our slower moving average.
If you look at our original chart, you can see that, as the two moving averages separate, the histogram gets bigger. In this case, for example, you see that the histogram starts to build to the up side at the same time that this big blue candle starts to appear on your chart. This means that momentum is building to the up side. On this case, when this candle starts to appear to the down side, you can see that we have divergence from the two lines and we have momentum building to the down side, because the histogram is building below zero.
When the MACD line crosses the center line, we have shifted to an immediate bull market. In this case you can see that when the MACD line crosses below the zero line or the center line, we have switched to an immediate bull market. When it crosses back above it, we have switched to an immediate bull market.
This is the overall look of the MACD. First of all for a bull setup. We have to be clear on something. Unlike other oscillators, we are not looking for extreme readings.
This means that we are not looking for the MACD to be above a certain level or below a certain level because the MACD does not show you overbought and oversold readings. It shows you the momentum in price. We also need momentum to start building to the upside, meaning that once we have hit an area of support, we will be looking for a signal line to cross above the MACD line and the histogram to start building to the upside.
You can see that here we have come to a support level, and then we have a signal line crossing above the MACD line and we have momentum building to the upside. Here we have a great opportunity to go long, and of course our stops should go always below the previous low.
In this case, we have a winning trade and we can exit the trade when the signal line crosses below the MACD line and momentum starts building to the downside. As you can see here, by doing this we have caught the best of the move up. In a burst setup at a resistant level we look for a signal line to cross below the MACD line. The histogram will start building to the downside to know the move has enough momentum to take price down.
Another Facebook chart, a 50 minute Facebook chart. You can see here that we have hit a big area of resistance and right here we have the signal line crossing below the MACD line and we have momentum building to the downside.
We go short and here we can take out our position when this signal line crosses above the MACD line and momentum starts to fade and build to the upside.