How The Pro's Trade Using MACD Technical Analysis


Uploaded by StockMarketStrategy on 22.04.2010

Transcript:
Hi Traders. Philip Thygesen from Stock-Market-Strategy. Before I start I just want to say that trading
involves risk and hard work. So please do your own due diligence before trading real
money. Today I am going to talk about Moving Average Convergence Divergence better known
as MACD. I will give you some information about MACD and then with the help of some
charts show you what MACD is all about what. Finally I will give some ideas how to trade
using MACD. If you go to our website www.stock-market-strategy.com you will find a tab called education, technical
analysis and MACD. Here you will find a written summary including a chart showing you how
to trade using MACD. This is made to make it easy for you to keep track of the information.
You might even print this page out so you can have it in front of you while writing
your trading plan or back testing the ideas shown here. Background Information about MACD
The MACD is one of the most widely used indicators. This is probably due to the simplicity of
the calculation and reliability of the signals. The MACD uses 2 Moving Averages. These two.
They are most often Exponential Moving Averages. Subtract the longer period from the shorter
period and the result is a line that oscillate above and below 0. That line is the yellow
one here called MACD Line. Here it crosses 0 also Center line. As well as here. And here.
I have plotted 2 corresponding MA's here to show you what the MACD tells us. Normally
the 2 MA's will not be plotted on your charts when you plot MACD on. First when the gap
between the 2 MA's are increasing the MACD Line will drop. Second when the gap between
the 2 MA's are decreasing the MACD Line will rise. And third when the MACD Line crosses
through the Center Line it tells us that the 2 MA's are crossing over. The gap between
the 2 MA's shows the momentum. So the MACD Line gives us an easy way of seeing that the
momentum is changing. The most used setting for the MACD is a 26 and a 12 period Exponential
Moving Average. You see the settings here. You can chose a shorter MA if you want to.
It will resolve in probably more trades but more whipsaws. So you have to back test to
see if those more trades will give you a bigger profit despite of a few more whipsaws. Usually
a 9 EMA is plotted together with the MACD to give you a quicker signal. You see the
9 EMA here. And here is the crossover so that's your signal instead of over here. But I will
get into more details about the entry. Usually when you have a MACD plotted on your chart
you will also have a Histogram plotted on. You see this here. The Histogram tells us
that the momentum between the MACD Line and the Trigger Line. When the MACD Line is underneath
the Trigger Line you will have a negative Histogram. When the MACD Line is above the
Trigger Line you will have a positive Histogram. We can use this Histogram to tell us whether
the momentum is increasing or decreasing. For example if you look at your MACD line
here you see that it is dropping nicely. So you would think the momentum is still intact
to the downside. But by looking at your Histogram you can see that it makes a higher low telling
us that the gap between the MAD Line and the Trigger Line is decreasing. So if you were
in a trade and having a nice profit you might consider taking some off the table because
you see this momentum shift. How To Trade Using The MACD Ok now you know how the MACD
works so now I will show you how to enter using the MACD crossover of the Trigger Line.
First I identify the trend. I see that my MA is up sloping so my trend is up. This means
I will be ignoring MACD crossover of the Trigger Line to the downside. Like this one and this
one. Second I will be looking for pullbacks to the MA here and here. This is because I
believe the best trades come after a consolidation. I define consolidation as pulling back to
the MA. And third I look for my MACD crossover of the Trigger Line here and here. I ignore
this signal because I believe the price is too far away from the MA giving me a bad risk
to reward. Here is another way to use MACD for entries. I don't just use the MACD crossover
here. I also add Divergence to the trade giving me a higher odds trade. First I look for price
to make a higher high compared to the old high. And MACD make a lower high compared
to the old high. This is MACD Divergence. Second I look for MACD to climb fast to suddenly
stall and drop fast. This is telling me that it probably caught a lot of traders on the
wrong side adding fuel to the fire. And third I look for the MACD cross underneath the Trigger
Line. This gives me my short signal. A high odds trade in my opinion. How To Trade Using
MACD Histogram Ok so you have seen how to use the MACD Line for entries. Now I will
show you how to use the MACD Histogram for an entry. As explained earlier, the Histogram
shows the gap between the Trigger Line and the MACD line. So it is a more short term
indicator and more prone to whipsaws then the MACD Line. So it is very important to
do extra analysis before trading this short term indicator. First I see that I have 1,2
and 3 almost equal highs. So I can see that there is some sort of resistance up here adding
extra evidence to my trade. Second I look for MACD Histogram Divergence. See that price
makes a higher high compared to the old high. And the Histogram makes a lower high compared
to the old high. And third there are 2 entry signals here. The first one is a bar closing
underneath the prior 3 bars. Or when the MACD Histogram goes into negative territory here.
Both of these entry signals are very good. This ends today's video. I hope you have enjoyed
it.