Maximizing the MACD Indicator

11/07/2011 9:55 am EST


Markus Heitkoetter

Author, Educator, Trader, and CEO, Rockwell Trading Services, LLC

Traders in all markets can use the MACD indicator, explains Markus Heitkoetter, but common mistakes and misconceptions must be avoided in order to achieve optimum results.

The MACD has become a popular technical indicator in recent years, but there is a lot of misinformation out there about it. We’re talking today with Markus Heitkoetter. Markus, how do you recommend that traders use the MACD?

Well, as said, the MACD (Moving Average Convergence/Divergence) is a fascinating concept. It is not a simple indicator; it’s an indicator study. So you are actually looking at three different indicators. 

You’re looking at the actual MACD, which is the difference between two exponential moving averages. The second part of the MACD study is actually the signal line, which is a moving average of the original MACD, and then you have the histogram in the middle. 

Now, traditionally, traders use the MACD as a simple crossover, so when the MACD crosses the signal line, they tend to buy or sell based on which way the cross appears. 

Now, which particular moving averages do you recommend using?

I like to stick to the standard of 26 and 12 for the slow and fast moving average, and 9 for the signal line, but there’s a twist that I like to use. 

I’m not simply looking for a simple crossover. I also want to see that the MACD is crossing the zero line. So, before establishing a long position, I want to see that the MACD is crossing its signal line from below and is crossing the zero line from below so it’s trading above the zero line. This way I can eliminate some of the whipsawing that occurs when using the MACD.

Now are there any particular market conditions or times of the market cycle perhaps that this works best?

Well I like to trade the first two hours after the markets open. I am a daytrader, so I like to trade from 9:30 am to 11:30 am ET, and this is when we typically see the nice trends. 

Once you are going into the lunch break, you often get a sideways market, and indicators like the MACD, as trend-following indicators, work best to identify trends, so you have to make sure that the markets are trending.

See related: The Best (and Worst) Times to Trade

How about for global markets if someone wants to trade currencies, for example, on overseas exchanges?

Well again, when trading currencies, you have the three different sessions. You have the European session, the Asian session, and the US session, and you just have to be aware of when they start and when they end and when the trends usually occur, and it’s easy to identify this on the charts. 

So essentially the MACD is an indicator that can really be used across all asset classes and across various time zones.

Yes, but I wouldn’t use a single indicator. It always helps to get confirmation from a second indicator. Now the more indicators you plot on your chart, eventually, you have conflicting information, but I like to use a second indicator to confirm the findings of the MACD.

And what would that be?

I love to use the Bollinger bands to confirm the trend.

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