Trading The MACD

I wanted to add the MACD to the System Tracker earlier this year, but there seems to be so much variation in interpreting the signals that I needed to confirm some tests that I have been running before presenting it. Anyone who uses the MACD should read Gerald Appel's book, Technical Analysis. In it he gives his rules for the MACD. The only objection I have to some of his examples is that in several cases he is buying against the trend, the trend being the direction of the 50dema.

For myself, I have made a couple of simplifications which I believe work very well. Nevertheless, one should not regard it as a purely mechanical method. Some discretion is necessary, I think, in determining whether the chart pattern has the right look. This is hard for me to quantify since I have spent so much time studying elliott wave that oftentimes I have an intuitive sense that a particular signal doesn't look right.

Following are my rules for using the MACD:

1. The trend is determined by the direction of the 50dema.
2. The strength of the trend is determined by the angle of ascent or descent of the 50dema.
3. In general, when the trend is flat or weak to moderate use the 12-26-9 MACD for buying or shorting, as well as for exits.
4. When the trend is strong use the 8-25-6 MACD for buying or shorting and the 12-26-9 or the 19-39-9 MACD for exits.
5. In general, the MACD must fall below the zero line for a buy signal to be valid and above the zero line for a sell signal to be valid.
6. Buy positive divergences and sell/short negative divergences in the 12-26-9 MACD.
7. If the market is breaking out to new highs or rises from below to above the 50dema, then exit on the second sell signal - not the first. Reverse for shorts.
8. If the trend is flat, buy on the second buy signal from a higher low or with a positive divergence. If there is a lower low, wait for a pullback to confirm the signal. Reverse for shorts.
9. Set a stop loss at a minimum of 2 ATRs below the entry, but at least below the prior low.
10. Trail a stop loss at a minimum of 1 ATR below pullbacks to the 50dema.

It is difficult to find circumstances where rule 4 applies; however, two recent examples are POT and MOS, which had several signals in a row.

I believe that rules 7 and 8 are probably the most important for applying the MACD successully, which requires some chart reading experience. Oftentimes, the first sell signal is premature and even if the next sell signal is from a lower high, that high will frequently retest the prior high so that there is not much profit given up. The first buy signal in a weak or flat trend is often a false signal. Waiting for the second signal to confirm cuts down on whipsaws.

I will provide some chart examples in future posts.

Currently this year, the MACD is outperforming all of the other systems in the System Tracker with an amazing 34.21% gain with only 3 trades. The ARR is 51.32%. The total time in the market has only been about 15 weeks out of the 34 weeks year to date.

At the present time the Qs are in a weak uptrend. The last buy signal occurred with the 50dema in a downtrend so it was only a short exit signal not a new long entry signal. The last sell signal occurred with a weakly rising 50dema, so it was not a valid short entry signal. Since the next buy signal is likely to find the 50dema flat, it will not be a valid buy signal. It will take at least one and perhaps two more signal before there is a valid entry point. If the next sell signal is from a lower high, then that would be a valid short signal. This may take one to two more weeks.

If you are currently trading actively, but achieving lower returns, you may want to consider using the MACD with the above rules and simplify your trading style.