MACD Day Trading
MACD day trading seems simple enough. Just buy long when the macd is at the bottom of the chart and sell when the macd is at the top. Unfortunately, it's not that easy.
The macd is an important day trading tool, but it has its limitations. MACD (Moving Average Convergence Divergence) is a trailing indicator. This means that it computes a series of previous stock prices, creates two sets of average prices based on this formula, and draws two lines to indicate their trends. Most macd day trading tools will also show a histogram, which is a series of bars standing either below or above the signal line.
The great thing about macd day trading is that it gives a clear visual day trading tool. It is probably one of the first technical indicators that day traders find and begin using. It seems to predict price movement - but, it does not. The new day trader must remember this important fact: it is a trailing indicator, not a predictor of price movement. This is a critical distinction.
MACD day trading has its limitations. For example, when a stock gaps down by a large amount, the macd lines plummet with it. But, if you will watch your charts, you'll also see that the macd lines will show a crossover pattern (thought by many to be a "buy" signal), even though the stock is trading sideways or even going down in price. The reason this happens is due to the trailing mathmatical formula in the macd.
In my books, I talk at more length about using the macd in trading stocks. One point deserves repeating though. When I am looking at gap down stocks, I use the macd as one of several technical indicators. I wait for the macd to form a "confirmed bottom" before buying the stock. A confirmed bottom is what happens when the fast line of the macd forms a horizontal line, just before it hooks upwards. The important point is that this confirmed bottom may appear at one point on a 5-minute chart, and it may appear later on a 10-minute chart. Using the 5-minute chart on a gap down stock can create a pre-mature entry if that is the only indicator you're using. It may show a bottom and yet continue to fall in price. That is why this indicator must be combined with other indicators for good trading.
So, the macd is not a fool-proof technical indicator. But, it can be one of your important indicators. Used in conjunction with other indicators, such as RSI (Relative Strength Index), it can be a powerful day trading tool.
The main purpose of this article is just to alert you to the fact that using the macd in day trading is not a stand-alone indicator. So, don't trust it as a Holy Grail that will waltz you toward easy profits.
Your day trading platform will come with a default setting for the macd. You can experiment with various settings. But, if you are day trading, rather than doing long term investing, a tighter macd setting might be more useful to you.
To see an annotated chart that uses the MACD, look at the blog dated 12-9-08. Or, you can view some of my public charts by following this link and scrolling down to the chart for AMSC:
Bob's Public Charts.
In the AMSC chart, I give annotations that show the multiple indicator signals for buying and selling this stock.
I'm offering a FREE bi-weekly e-zine called "Day Trading with the Technicals". I take one stock and look at the interface between price and technical indicators for that chart. The e-zine is free and so is the Free Report that you receive when you sign up for the e-zine. The Free Report is called "The Most Important Activity for any New Day Trader" and is available to you after you confirm your subscription. Hope you enjoy.
If you'd like to look at other strategies, other than macd day trading, then click this link.