MACD OverviewĪs you can see, the MACD (Moving Average Convergence/Divergence) indicator draws below a normal chart and contains a histogram and two lines. However, if you are looking to build a trading system, this makes for a simple and convenient starting point. You know from the strategy basics that it only works in trends. The system then generated another buy signal in early April.ĭemonstrating that this system works during a four month stretch of a strongly trending market does not mean this is a proven strategy. It would then catch the big move during the entire month of January, then gone to cash in February.Īfter avoiding the pullback at the end of February, there was a buy signal that captured the strong trend during the first two weeks of March, then a sell signal for the second half of March. The system would have logged some nice profits before generating a sell signal as the market pulled back at the end of the year.Īfter about one week on the sidelines, the system would have generated another buy signal as the market exploded to start the year. If we use the chart of the SPY above as an example, the system would have given a buy signal in late November, right after the SPY broke above the 200 day simple moving average.
The S&P 500 ETF SPY from November until the present They are simple rules for a complex world. Is this market trending? If yes, apply the strategy. Apply the high level filter yourself when trading. You know where this strategy makes money – in trends. This SMA-MACD system is a perfect example of why it’s so hard to create a jack of all trades strategy. This could cause quite a bit of whipsaw action during sideways trending markets.Įdward wrote about creating a specialist Expert Advisor on Friday.
While this adds some security, the system will still struggle during non-trending periods. It makes sure that you won’t be shorting a market that is in a strong uptrend, or buying a market that has been declining. Trading RulesĪdding the 200 SMA enables the system to ride major trends. An up cross signals that the trader needs to cover the position. The MACD line crossing below the Signal Line is considered a short signal. Reverse the signal rules if the market trades below the 200 SMA. Anytime the MACD Line crosses below the Signal Line creates a sell to exit signal.
If the market being traded is trading above the 200 SMA, then any time the MACD Line crosses above the Signal Line is considered a buy signal. This system uses the 200 period Simple Moving Average (SMA) to determine which direction the long term trend is moving, and then uses the MACD/Signal Line crosses to determine entry and exit points. One of the most basic systems that uses the MACD indicator is the MACD/200 SMA system. With that idea in mind, let’s look at a very simple system that uses just one indicator, the MACD. It is more important to know a few indicators inside and out than it is to know very little about every indicator. Simple is better, especially for the beginning trader.
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