Reverse Macd

[Gabriel Litke]

Momentumin markets is similar to momentum in the physical world. If you throw a ball in the air, it will ascend at a slower and slower pace until it reverses course and begins falling. The same is true in markets.

The MACD is a lagging indicator because the data used to chart it is historical data. By looking at recent movement in the price of a security, traders can use the MACD to identify the beginning of new trends which are likely to continue. This data, however, lags the current price of the security.

The MACD indicator is useful for spotting changes in market momentum, which can help traders identify new trends. The relative strength index, or RSI, measures the magnitude and speed of recent price changes, which is useful for spotting securities that are overbought or oversold, or that may experience a pullback in the near future. Neither indicator is better than the other. They are often used in combination because using a single indicator can result in false signals.

The MACD indicator may create highs and lows that are greater than the corresponding highs and lows of a security's price. When this happens, it is called a divergence. A bullish divergence happens when the price of the stock reaches a new low but the MACD does not. A bearish divergence happens with the price of the stock reaches a new high but the MACD does not. This can indicate that the higher or lower move of the price won't last.

I think this sort of system works well for people who are trigger shy since you just have to follow the signals for trade entries. But at the same time, you can practice your technical analysis because you still have to set your stops and profit targets manually.

The setting of profit targets and stop losses is purely discretionary. Initially, I had a 30-pip rule for targets. But later on I found out that I could maximize my profits by just exiting my trades only when reversal signals started to materialize.

Last Friday there was a valid buy signal on GBPUSD around NY open. There was a ParSar reversal, MACD crossover, and Stochastic didn;'t indicate overbought conditions. As you can also see, price found support at the trend line.

Anyway, as you can see the signals lined up (parSAR revesal, Stochastic not oversold, anbd MACD crossover). Shorting at 1.4665 (immediately after the reversal) with a 40-pip stop (above 1.4700) would have been enough for your trade to yield a 1.5:1 return on risk ratio as you would have exited your trade at 1.4605 when the parSAR reversed again.

Oh yeah! I managed to make some money using my PMS system yesterday. I shorted GBP/USD when the signals lined up. I entered as soon as I saw the parSAR dot reverse at 1.6445. Placing my stop above the dot at 1.6485, I held on to my trade until another reversal materialized at 1.6365. By doing so, I was able to enjoy a 2:1 return on risk ratio on my trade.

Whaaa! Missed another winning trade on my PMS system yesterday. I saw the signals materialize but I opted to stay out of it because I noticed how choppy the reversals and crossovers were before this winner.

Hello,

Nice system Im starting to like it. Can you keep posting charts?

Do all the signals usually happen simultaneously? If not, then how long is it appropriate to wait for the next signal to occur?

Confluence is the magic word when it comes to building a trading idea. Traders who only rely on a single indicator or tool, will receive very mixed results to say the least. By combining indicators and trading concepts, a trader can significantly enhance the quality of his decision making process and often increase the reliability of his signals while offsetting the limitations of individual trading tools.

In the following examples, we use 4 different trading concepts to form trade ideas (Bollinger Bands, MACD, Fibonacci Extensions and price action). However, we do not require all criteria to be present at all times to enter a trade. We differ between a no-trade scenario, an inferior trade, a decent trade and an optimal-trade scenario. The checklist below shows how the different scenarios are characterized. Furthermore, if you follow such a structured approach and categorize your trades into different classes, you will be able to see which signals provide more reliable signals and which do not add additional value.

First, look at the left screenshot. How often do you find yourself in such a position where you look at a very overextended trending move and wonder why it has turned at a specific price, but did not reverse earlier? Traders have a tendency to try to call tops and bottoms which, if done incorrectly, can lead to disastrous results.

Point 1) After the second swing, price barely touched the Bollinger Bands (weak signal), it also came short of the 138 Fib extension (another weak signal) and we cannot spot a reversal price action pattern. The only thing pointing to a possible reversal is the MACD divergence.

Point 2) Now, price made it to the 168 Fib extension (very extended move), it breached the outer Bollinger Band significantly and the MACD histogram is showing a divergence. Only the price action reversal pattern is missing (although a Head & Shoulders patter formed later as well).

Recapitulating: Price action pattern, Breached Bollinger Bands 2 out of 4 criteria Weak signal and inferior trade (would have resulted in a loss for traders who only rely on 2 criteria)

Recapitulating: Overextended Fibonacci level, Breached Bollinger Bands 2 out of 4 criteria Weak signal and inferior trade (Depending on trade management, this trade would have resulted in a loss or a small profit for traders who only rely on 2 criteria)

Point 2) Again, price went outside the outer Bollinger Bands (signal), it reached the 200 Fibonacci extension (signal) and the MACD printed a divergence (note that the divergence was only confirmed once price went back into the Bollinger Bands). Only the reversal price action pattern was missing.

Recapitulating: Overextended Fibonacci level, Breached Bollinger Bands, MACD divergence 3 out of 4 criteria Good signal. The retracement was also much stronger than on the previous point. Depending on the trade management, a trader could have realized a profit.

Point 3) This time, the swing did not make it past the previous swing high (lower high , a bearish signal) and not made it through the outer Bollinger Bands. The MACD is showing a convergence (lower MACD and lower high bearish confirmation). Price came close to the 200 Fibonacci again and we saw a head and shoulders pattern.

Point 1) Price is outside the outer Bollinger Band and the MACD is showing a divergence. But, price just barely broker below the 0 Fibonacci and is nowhere near the overextended Fibonacci area and no price action pattern occurred.

Recapitulating: 2 out of 4 criteria present (Bollinger Band and MACD divergence). Could have resulted in a (small) profit, if a trader feels comfortable taking trades with only 2 confirmation signals.

Point 2) Price had been outside the outer Bollinger Bands for a relatively long time, the MACD is showing a convergence (lower lows on price and lower lows on the MACD histogram). No price action pattern is present and price is only at the 138 Fibonacci extension.

Point 3) Price did not make it through the outer Bollinger Band. But the MACD is showing a divergence, price stopped right at the 168 Fibonacci level and we saw an opening run-away gap which is a bullish signal at this level.

Recapitulating: 3 out of 4 criteria present (MACD divergence, price action pattern, Fibonacci extension). Decent trade setup followed by a strong reversal to the opposite Bollinger Band.

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The MACD is built on the difference between two moving averages (usually the 12-period exponential moving average (EMA) and the 26-period EMA) and a signal line, which is the 9-period EMA of the MACD line itself. The interplay between these lines provides traders with signals about potential market moves.

The MACD line crossing above the signal line indicates a bullish signal, suggesting it might be a good time to buy. Conversely, a bearish signal is indicated when the MACD line crosses below the signal line, hinting at a potential sell opportunity. The divergence or convergence of these lines also provides insights into the momentum and possible reversals in the market.

How the Moving Average Convergence Divergence (MACD) works, we delve deeper into the mechanics and implications of its signals, providing traders with nuanced insights for making informed decisions.

The MACD operates on the principle of moving averages, which smooth out price data to create a single flowing line that makes trends easier to identify. By comparing two moving averages with different periods, the MACD can signal changes in momentum, trend direction, and strength.

Bullish Signals: A bullish crossover occurs when the MACD line (the difference between the 12-period and 26-period EMAs) crosses above the signal line (the 9-period EMA of the MACD line). This event is typically interpreted as a signal to consider opening a long position or closing a short position, as it suggests upward momentum is gaining pace. Bearish Signals: Conversely, a bearish crossover happens when the MACD line crosses below the signal line. This suggests that downward momentum is accelerating, potentially signaling a good time to sell or short a position. Traders often view this as a warning that the current uptrend may be weakening or reversing.

Divergence occurs when the price of an asset is moving in the opposite direction of the MACD indicator. A bullish divergence, where the price is making new lows while the MACD is making higher lows, can signal a potential reversal to the upside. Bearish divergence is the opposite, suggesting a downward trend might be on the horizon.

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