MACD Trading System
2 min chart
MACD Indicator (no histogram)
MACD setting: 12-26-9
The MACD (Moving Average Convergence Divergence) indicator was created by Gerald Appel back in the 1970's. Some traders consider it to be an effective momentum indicator, constructed using the difference between two moving averages which are trend following indicators.
Therefore, enabling a trader to have both trend following and momentum characteristics in one indicator. It consists of two lines and sometimes includes a histogram as well.
The MACD line is the difference between a 26 period ema and a 12 period ema.
ema = exponential moving average
The Signal line is simply a 9 period ema of the MACD line.
If you were using a histogram (which we are not in this example) it would be the difference between the above lines.
The MACD is based on moving averages, which of course are derived from price, therefore it is a lagging indicator.
Typically, buy signals are taken when the MACD line crosses above the Signal line and sell signals are taken when the MACD line crosses below the Signal line.
Another way that some get trading signals from this indicator is when either the MACD or Signal line crosses the Zero line.
MACD TRADING SYSTEM SIGNALS
This MACD trading system does use the above methodology...well, actually only part of it is used. Here the Signal line is used as a trend indicator and MACD line - Signal line crossovers are used as the trigger.
Buy Setup: Signal line (yellow) is above the zero line, indicating an UP trend.
Buy Trigger: MACD line (green) crosses above the Signal line.
Exit: MACD line crosses below the Signal line OR alternate exit.
Short Setup: Signal line is below the zero line, indicating a DOWN trend.
Short Trigger: MACD line crosses below the Signal line.
Exit: MACD line crosses above the Signal line OR alternate exit.
The example 2 min. chart of QQQQ below shows two winning trades and one losing trade. This MACD trading system keeps you from making trades that are not in the direction of the trend, as determined by the Signal line.
Notice that there were no long entries, because every time the MACD line crossed above the Signal line, the Signal line was below zero.
However, a trader with experience would've noticed that after 1:30 pm the Signal line moved above zero, while at the same time price broke out of a triangle pattern and made two higher highs.
So, when the MACD crossed above the Signal line after 2:00 pm, and the Signal line was very close to zero anyway, that could've been used as a decent buy signal.
Strictly by the rules? No, but it makes good trading sense to me.