π Do professional traders use MACD?
MACD Technical Analysis and Accuracy
Trading requires a lot of keen technical analysis before a trader makes a decision. This article gives an insight into the MACD, RSI, and Stochastic trading strategies that professional traders use to make decisions.
It also informs readers of the accuracy level of the MACD trading strategy. In addition, it discusses how traders combine strategies or apply a double MACD strategy to increase the accuracy of their predictions.
What is MACD trading strategy?
A moving average convergence divergence (MACD) is one of the most used financial indicators. Traders use it to identify profitable opportunities.
The MACD is a momentum measuring indicator since it informs traders about assetsβ momentum and if they are on an upward/downward trend in the market.
How advanced MACD strategy works
To start, the MACD has the following three components:
- MACD line indicates the difference between two moving averages.
- A signal line that gives trader buying and selling signals
- A histogram shows the space between the MACD and signal lines.
When operating the MACD, you can set it at different periods according to your liking. According to the moneyshow.com site, the creator of MACD (Appel Gerald) advises that traders should use MACD settings 8 17 9 to enter a market. After that, one should switch to the default setting combination of 12 25 9 when fishing for selling signals.
When professional traders are using MACD to predict the price momentums of assets, they usually look at the following:
a) Crossovers
Macd crossovers happen when both the MACD line and the signal line intersect. Depending on the situation, the assets might be having a bullish or a bearish crossover.
A bullish crossover happens when the MACD line goes above the signal line. When the opposite happens, the asset has a bearish crossover. A bullish crossover indicates that an assetβs price is about to hit higher highs whereas a bearish crossover shows that the prices are about to hit lower lows.
However, before taking a position, one should wait for a confirmation where the prices increase beyond the resistance level and decrease beyond the support level.
b) Divergences
A divergence occurs when the MACD line and the signal line move in different directions from each other. At this point, one should not trust the price momentum because divergence is a sign of a future reversal. The reversals occur to correct the trading market.
MACD crossover strategy success rate
According to the handsoff investment, the MACD crossover strategy success rate stands at 49%. The site specifies that a bullish crossover has a predictive accuracy of 52.8%. On the other hand, the bearish crossover has a price prediction accuracy of 45.8%.
The best MACD settings for swing trading
Swing trading is the practice of gaining profits from changing trends in the trade market over short periods. There are several strategies that traders can apply. However, in this article, we concentrate on the MACD trading strategy.
As earlier stated, when using an advanced MACD strategy, it is best to use the default setting combination of 12 25 9 when looking to sell. When the MACD bullish crossover occurs above the zero line, that is a sign for one to buy.
When the bearish crossover is below the zero line, you can consider it a sell signal.
Point of a double MACD strategy
Sometimes to increase the accuracy of a prediction, a trader usually implements a double MACD strategy. In a double MACD strategy, one usually sets two-period settings. It will result in a fast and slow momentum line.
The slow momentum line will give a future prediction of expected trend changes. On the other hand, the fast momentum line gives a quick warning when the changes occur.
When a crossover happens on the fast MACD line, it signals an individual to open the trader and vice versa. In addition, when the slower MACD is below the zero line and the price is below the moving average, a trader can make a sell.
However, on the other hand, when the slower MACD is above the zero line and the price is above the moving average, an individual should go ahead and purchase the asset.
MACD and stochastic trading strategy
MACD is not as efficient when it is applied just by itself. It is why traders have combined the MACD and stochastic trading strategy to have more accurate results.
When the stochastic oscillator is above 80%, the asset is overbought. The trend will most likely reverse. On the other hand, if it is below 20%, the trend is low and will be diverse.
A buy signal for traders occurs when the histogram has a positive value and the oscillator crosses the oversold sector.
On the other hand, a sell signal is when the oscillator crosses the overbought sector and the histogram has negative values.
MACD and RSI strategy
RSI indicator shows the momentum of price changes. The indicator enables traders to spot the overbought and oversold assets.
When the traders combine the MACD and RSI strategies, they normally have more accurate predictions. Traders are usually confident to open a position when the two strategies move in the same direction.
However, when both the MACD and RSI diverge, most traders prefer to exit a position. It is because they have lost the confidence to take a position.
Summary
The article above introduces us to MACD, RSI, and stochastic trading strategies that professional traders use as indicators when making trading decisions. From the text above, we see that:
- MACD crossover strategies are 49% accurate with bullish crossovers having a 52.8% prediction accuracy.
- MACD settings can be set at any intervals but the 8 17 9 settings should be used when one is entering the market.
As a reader, taking time to go through this article and comprehend the content will help you to sharpen your trading skills.
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