Could Two MACDs Be Better Than 1?

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Article Summary: The way in to a trade isn’t always the ideal way to avoid it. Because trading is a zero-sum match, once you are at a trade, industry (or your own brain ) will continue to work to convince one that you should depart your trade, or that the market is going to reverse, or else you should really be pleased with your profits so much and call it a day. Many times, that isn’t in your own best interest. Even the MACD does a fantastic job of displaying high-probability entrances but a very simple adjustment will be able to assist you to ride the existing move for whatever it’s worthwhile.

Many traders get the job done overly much in their entry, maybe not spend time concentrating in their own exit. Regrettably, it’s the departure that’ll learn just how much you fundamentally take out of the sector or a lot your equity you devote into this industry trying an idea. 1 tool which we’re able to turn into finetune our exits could be your Moving Average Convergence-Divergence or even MACD.

The MACD Was Made from the late 1970s by Gerald Appel who termed MACD within a”indicator for all seasons”. As the index could help traders’ time entry and exits as well as work on all time frames, it quickly became a favorite to many. However, a method was introduced by Appel in the creation of MACD to help traders stay in the right trade longer that we’ll explore in this article.

Learn Forex: MACD As Displayed Below Price Action

If you’re new to MACD, it is a rather simple product that is created by subtracting a longer-term Exponential Moving Average EMA from a shorter-term EMA to find trend direction. The red MACD line will rise if shorter-term trends are gaining strength and declines if shorter term trends are losing strength. The divisor on the picture above is known as the histogram or zero line and is the litmus test as to whether the trader is bullish or bearish in her outlook on the pair.

Signal Line for Trend Confirmation

The signal line helps you confirm whether the trend has the force or momentum necessary to carry it through. This confirmation is show when the MACD crosses above or below the signal line. On the chart above, the signal line (Blue) is a 9 period moving average of the MACD line.

Learn Forex: Signal Line & Histogram on MACD

Histogram — Filter for Trending Environments

The Histogram is your tipping point on the currency pair you’re considering to trade. When the shorter / faster moving average crosses the larger / slower moving average the MACD will cross the zero line in its respective direction. When the MACD is above the zero line, you should consider only entering buy trades or adding to an existing long position so that you’re not trading counter trend.

If you’re trading a histogram crossover, you’re essential trading a 12 & 26 moving average crossover. Moving average crosses are a tried and true trend trading system. However, the moving average cross isn’t always the best method to get you out of the trade that you entered so we will look at fine tuning the MACD to time our exit.

Traditional MACD Exits

The MACD methods that is used to enter a trade can also be used to exit. In other words, you can look for a zero line crossover or the tradition signal of the MACD line crossing the signal line. However, as you can see from above, that will often have you in and out of trades while potentially losing out on the trade that you looked to capture in the first place.

Adding a Second Slower MACD Fore Exits

The argument for having two MACDs is that you have a sensitive (faster) MACD to get you into a potential trend and a less sensitive (slower) MACD for exits. As mentioned earlier, exiting a trade properly is often the toughest part of trading well and the second MACD can help with that. The settings we’ll use for the second MACD are 19,39,9.

Learn Forex: Improving Your MACD Signals with a Second MACD

The first thing you’ll notice is that each MACD has a specific purpose. The top MACD using the 12, 26, & 9 readings are used only to enter the trade. The bottom MACD using the 19, 39, & 9 readings are used only to exit the trade.

The entry rules are different from the exit rules so as to keep you trading into the direction trend but at the same time not to give up too much of your profits if it was a good trade. The entry rules look for a zero line crossover on the 12, 26, & 9. The exit rules look for a simple MACD line crossover of the signal line on the slower 19, 39, & 9.

The additional filter that is used is a simple moving average on the chart like the 50, 100, or 200. The purpose of the simple moving average is to fine tune your entry even further so that if there is a buying zero line cross over on the entry MACD but price is below the simple moving average you trade with a caution. However, the goal remains the same of entering as soon as the trend shows itself and being slower on the exit so that you catch more of the trend.

Closing Thoughts

When markets breakout they tend to move very fast so you can use the same tool with different settings. Gerald Appel, the creator of MACD recommended using two MACD combinations so that you can buy fast and sell slow in an uptrend or sell fast and buy back slowly in a downtrend. When markets tend to be most erratic, the second MACD can help to calm your nerves and prevent letting go of hard fought winnings.

Happy Trading!

–Written by Tyler Yell, Trading Instructor

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