Article 5 - Using MACD In
Determining Trend Direction
By Vic Noble
Dec 13, 2006
MACD is a technical indicator that is widely available on most charting services, and it stands for
Moving Average Convergence/Divergence. Although it is a lagging indicator that plots a comparison of a short term and
a long term moving average, it does represent a momentum oscillator that, when used properly, can be very
effective in helping determine trend movements, including reversals.
One of the most common problems that traders is getting the direction right, and I’d like to show you an
example of how traders frequently misinterpret price action because of a flawed use of MACD.
I use MACD in one of two ways—to indicate a price trend continuation, or to
signal a possible trend reversal.
Today, I’m going to focus on trend continuation, and how false signals can be generated by making the common
mistake of only focusing on the lower time frames.
One of the problems that many traders run in to with MACD and other technical indicators is that they fail to
make multiple time frame assessments. Of particular importance is that the higher time frames are much more important
than the lower time frames in terms of reliability. The following charts will illustrate how this plays out.
The chart below is a 15 minute time period on the USD/JPY currency pair. Notice how MACD had just crossed below
its signal line at the point indicated on the chart.
Many people believe that this is a selling opportunity. This is a very limited way to look at this situation. You
should NEVER look at charts in isolation! In other words, check all of the other time frames before making a
trading decision.
Now take a look at the chart below and see what MACD was doing on the hourly chart on this currency pair at
the same time.
What a difference! Not only was this NOT a good place to sell (as the 15 min MACD would have you believe), but it
was in fact a very good, high odds set up to buy! All you had to do was consult the higher time frame, in this case,
the hourly chart, and together with some other tools, which will be the subject of other topics, you could easily
have entered this as a buy. And just so you know, the ensuing move was worth over 40 pips!
So, always keep an eye on the higher time frames—you’ll be glad you did!
All the best.
"Just a few days ago, I did a 2 hour coaching session with Vic Noble and
another student. It actually went over 2 hours as Vic wanted to make sure we got it, which I thought was noble
of him…pun intended. And get it, we did. Up until this session, there was a missing link in my system. I wasn't
seeing the whole picture. Vic touches on some crucial issues that make or break a trader. Two of the most important
are 1) trade management (when, where, and how to enter and exit a trade, plus where to place stops) and 2) risk
management (this was one of my weak points for sure). This was probably one of the best tips I picked up because
now, with very solid risk and money management, I don't sweat a loss. I now recognize, with this system, that I will
win more than lose and come out ahead in the long run. It’s taken the emotions of fear and greed out of the equation
so I now remain relatively calm and am no longer anxiously glued to the screen cringing at every little agonizing
setback. It’s no big deal now: well it is when I win! In fact, I have been winning after practicing and digesting
what Vic taught me. I did take one loss, but I didn't freak out over it like before. Vic incorporates very effectively
much of Peter Bain’s system but with an added touch using Fiboncacci points among other things. Fibs show a clear
picture of where to enter and exit trades. I had studied them prior to our session, but didn't really get it until
Vic very clearly explained how they work. He also emphasizes that you need to stick to one system consistently and
patiently wait for the right set-up. As a matter of fact, as I write this, I am currently in a trade that I saw
developing and waited for it to come together as Vic showed us. I am up 10 pips already and expect to make 20 more
as I have already figured out where I should exit: another tip from Vic. In conclusion, I just want to say that,
along with being a nice guy, Vic is a patient and effective teacher. I am a retired teacher myself and am aware
of the qualities that good teachers possess. Vic turns something that seems quite complicated into something
that is very simple to understand and easy to implement. I am very happy to give this unsolicited testimonial for
Vic and this truly amazing system. Sincerely," *
Ted Hamilton, M.S.Ed., Hermosa Beach, California
* Unique experiences and past performances do not guarantee future
results! Testimonials herein are unsolicited and are non-representative of all clients; certain accounts may have
worse performance than that indicated. Trading spot currencies involves substantial risk and there is always the
potential for loss. Your trading results may vary. Because the risk factor is high in the foreign exchange market
trading, only genuine "risk" funds should be used in such trading. If you do not have the extra capital that
you can afford to lose, you should not trade in the foreign exchange market. No "safe" trading system has ever
been devised, and no one can guarantee profits or freedom from loss.
|
