Trading Thoughts: What is the MACD?

22 January 2019 | Juan Breytenbach
 


The MACD is the acronym for Moving Average Convergence Divergence. MACD is the formation of two moving averages diverging from and converging with each other giving clear trading signals.

 It is a lagging, trend-following indicator which shows the relationship between two moving averages of a financial instrument’s price. The indicator can be used on stocks, forex, commodities etc.

This indicator works well when used to identify the start of a new trend, the direction of the trend, as well as the duration of the trend. The MACD will hold you in the trade for a longer move as it is a lagging indicator, it will also indicate how long investors should stay in a trade. There is an old trader’s saying that "the trend is your friend," and few indicators are as accurate in giving trend information as MACD.

Knowing the pros and the cons of all the various analysis types will give you an edge in trading the ever-evolving financial markets.

Below is a chart of Standard Bank (SBK) with the MACD indicator below. With a 9-day (blue line) and a 26-day (red line) which is the standard or generic setting on most trading platforms. When the 9-day MACD (blue) is crossing the 26-day MACD (red), which indicates that Standard Bank could be a short-term buy at current levels and vice versa.

(Click image to enlarge)image1

You can load this chart up yourself in our free Advanced Charts, and play around with the MACD (and other) indicators by selecting ADV CHARTS on any share’s QuickShare page:

Alternatively load Standard Banks chart up directly from this link and play around with the MACD

The MACD was developed by Gerald Appel in the late 1970’s and has since been one of the most popular indicators for traders and has been incorporated in almost every single charting package  due to its simplicity and effectiveness. 

The MACD drawbacks:

  • A lot of triggers don’t have follow through (when the market goes sideways or consolidates).
  • It is a lagging indicator, i.e. the trigger will be late compared to a leading indicator, i.e. RSI.
  • The generic 12, 26, 9 setting is a bit delayed on the weekly charts.

The MACD advantages:

  • Works very well in a trending market, even if there are wide oscillations in price.
  • Works well in both bull and bear markets.
  • Easy to use and understand.

Top Trading Tips: How to get the most out of the MACD Indicator

  1. Identify what sort of market trend is being depicted; is it a choppy sideways consolidating market or is the market trending nicely up or down.
  2. The MACD works very nicely after a very long trend i.e. a sell-off of 2 or 3 weeks. When the MACD crosses, it is time to cover shorts and look to enter long trades.
  3. MACD cross below a period of support or resistance, the likelihood of that break occurring is much higher.
  4. When you do your research on the MACD indicator, a lot of people say that divergence on the MACD works. To be honest, I haven’t found this does not work well.
  5. Always have a trade idea, don’t just trade the MACD cross overs blindly. Look for a fundamental reason, support resistance etc. to initiate the trade. Let the MACD assist with timing of the position.
  6. Use the MACD in conjunction with other technical indicators.
  7. Don’t put your stop loss right at the previous low or high. Mr. Market has a way of flushing through these levels to get the weak hands out before going higher or lower.

For more tips on how to use this indicator and others to assist your trading strategies, contact our trading desk, or email juan@sharenet.co.za directly.

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Juan Breytenbach
Sales Trader : Sharenet Johannesburg

Juan developed a passion for the markets and short/medium term trading early in life and decided to pursue a career as a professional trader back in 2012. He started his career at Vunani Private Clients, as a private client trader as well as in “principal” capacity before moving to Capilis Asset Managers (later acquired by Sharenet). Juan uses a holistic view when analysing market opportunities. He considers everything including technical and fundamental analysis, as well as Sharenet Analytics and other quantitative models to identify trade ideas as well as entry and exit levels. Juan is an avid sportsman and a big history nerd. He holds the designated Registered JSE securities trader, RE5 & RPE exams and is currently studying towards his B. Com Banking degree.


Disclaimer:
The information contained in this article is for informational purposes only and must not be regarded as a prospectus for any security, financial product or transaction. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial issue. Investors should consider this research/article as only a single factor in making their investment decision. We recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs. The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Sharenet.

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