How Reliable Is Using the MACD in Trading Strategies? (2024)

FAQs

How Reliable Is Using the MACD in Trading Strategies? ›

While the MACD has many strengths and can help traders spot trend reversals, it is not infallible and struggles, particularly in sideways markets. Since the MACD is based on underlying price points, overbought and oversold signals are not as effective as a pure volume-based oscillator.

The MACD trading strategy in its most basic form involves using the crossing of the signal line as your entry or exit point for a trade. Although this approach can deliver profitable results in many cases, the MACD's signal can often fail.

MACD with PRC has a 90% success rate. A stock's moving averages should at least approach one another, if not cross, before you act on that stock. MACDs rely on three exponential moving averages instead of one or two. Look for patterns where the three moving averages come together closely.

MACD is used by technical traders in stock, bond, commodities, and FX markets. Some MACD strategies include the histogram, the crossover, the zero-cross, the money flow index, and the relative vigor index.

MACD is a popular technical indicator used by traders across many different markets, however its usefulness has been questioned. One of the main problems with divergence is that it can often signal a possible reversal but then no actual reversal actually happens—it can produce a false positive.

MACD is best used with daily periods, where the traditional settings of 26/12/9 days is the default.

The strategy is to buy – or close a short position – when the MACD crosses above the zero line, and sell – or close a long position – when the MACD crosses below the zero line. This method should be used carefully, as the delayed nature means that fast, choppy markets would often see the signals issued too late.

The Schaff Trend Cycle (STC) is a technical analysis indicator used in trading and investing to identify trends and generate trading signals. The STC indicator helps to identify trends in a smoother and more responsive manner compared to traditional MAs and even under certain parameters, the MACD.

RSI and MACD are two valuable instruments for technical traders. The RSI is particularly effective in identifying instances where the market is either overbought or oversold in range-bound conditions. The MACD, on the opther hand, is most useful in trending markets as it highlights changes in momentum and trends.

Cons of using the MACD

If a trader has a longer-term outlook that this, the MACD may not be suitable. Another potential downside is that the MACD is a trend following indicator. This means that the indicator gives its signals as the trend occurs, not before it starts.

What is the best combination with MACD indicator? ›

MACD + RSI + SMA

This combination uses one leading (RSI) and two lagging (MACD and SMA) indicators. The RSI shows the potential future price changes. The SMA is a trend-following indicator that lags. While the RSI shows potential reversal points, the SMA helps in confirming these signals.

Increasing the number of periods for the signal line will reduce the number of crossover signals, helping avoid false signals. However, trade signals will occur later than they would with a shorter signal line EMA. The indicator can be applied to any timeframe, but it's preferable to choose those from H1 and bigger.

While the MACD has many strengths and can help traders spot trend reversals, it is not infallible and struggles, particularly in sideways markets. Since the MACD is based on underlying price points, overbought and oversold signals are not as effective as a pure volume-based oscillator.

Some of the most commonly used technical analysis indicators include moving average (MA), relative strength index (RSI), moving average convergence divergence (MACD), stochastic oscillator, and exponential moving average (EM).

MACD offers a visual representation of the ups and downs in price action as influenced by market volatility. The idea being that, once the indicator has signalled a significant change in market behaviour, turning from bullish to bearish for example or vice versa, you have a potential entry or exit point for your trade.

Cons of using the MACD

If a trader has a longer-term outlook that this, the MACD may not be suitable. Another potential downside is that the MACD is a trend following indicator. This means that the indicator gives its signals as the trend occurs, not before it starts.

RSI and MACD are two valuable instruments for technical traders. The RSI is particularly effective in identifying instances where the market is either overbought or oversold in range-bound conditions. The MACD, on the opther hand, is most useful in trending markets as it highlights changes in momentum and trends.