Intraday Trading Tactics

Combining Price Action Trading With MACD

This article on intraday trading tactics shows one method of using the MACD indicator to day trade stocks along with an alternate method of combining naked price action for trades. Well, not exactly naked...we're going to use some lines on the chart too. The original strategy rules are covered on the MACD Trading System page.

This scalping system is typically traded on a faster time such as a two or three minute chart or an appropriate tick or volume chart. Because of the nature of the MACD with default settings, using it on a 10 or 15 minute chart just wouldn't present enough trades during the day to keep an intraday scalper happy.

So if you're aiming to make trades that often last less than an hour this trading system might be for you. You'll notice I call it a system and not a strategy, since it does provide a rule-based, objective exit that can be backtested. However, two of the intraday trading tactics you'll be learning on this page will modify the rules to be discretionary.

Going over the entry and exit rules for a just a moment -- the MACD average determines the overall trend which gives you the set-up. When the MACD average is above zero, a trader waits for a trigger to go Long.

When the MACD average is below zero, a trader waits for a trigger to trade short. The trigger for entries and exits, is a cross of the MACD and its average. The general idea here is to make trades in the direction of the trend as determined by the MACD average.

In the chart below, Cummins (CMI) produced 4 trade signals: 2 short trades and 2 long trades. Following the rules of the system, one trade would've been a loser -- not bad.

Intraday Trading Tactics on 2 min. chart with MACD

Intraday Trading Tactics 1

Now we're going to take this intraday trading system and change the exit strategy from being controlled by the MACD to a discretionary use of trendlines for exits. I'm going to have to draw very thin trendlines on this chart since it's getting so crowded, but I think you'll see where I'm going with it.

The chart of CMI below is the exact same chart as above with with the addition of trendlines for a breakout exit. As you can see, in this example the use of trendlines gave a better exit than the MACD cross on every trade.

Trendlines can serve as an excellent discretionary trailing stop.

There will be times, of course when the MACD cross keeps you in the trade longer for a more profitable day trade and the trendline exits a trade prematurely. This is to be expected. But overall, at least in my experience, trendlines make for a simple, but every effective intraday trading tactic.

 MACD on 2 minute chart of CMI

Intraday Trading Tactics 2

Once again, I'll use the same chart of CMI with the same MACD indicator. Except this time, I'd like to show you a different way to enter intraday trades using a combination of trendlines and the MACD.

The rules are similar to above, but here we use the break of a trendline or support/resistance line and previous bar as the entry. Again, the trend is determined by the MACD average being above or below zero and breakouts trades are only taken in the direction of the trend. The MACD does have lag, but it does decent job of putting a trader into some good trades with the trend.

day trading trendline breaks

Here's another example using Agilent Technologies (A).

Agilent shows at least 5 Long trades and 1 short trade. The indicator only allowed short trades for about two hours on this two minute chart. Interestingly, some of the potentially profitable breakout trades were not accompanied by MACD crosses.

MACD and trendline break strategy

Well, there you go. I hope I gave some of you some new food for thought on possible ways to combine price indicators with price action as an intraday trading tactic. Combining the two could lead you to investigating all kinds of interesting trading ideas.

Good Luck.