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  1. #1
    Administrator Martin Kay's Avatar

    Moving Average Convergence Divergence Tool - Good for Trends?l !!!

    Hi guys, new MACD tool review, good for Binary Options beginners?

    Originally posted by Bogdan G. Click here for the full review

    Why does the MACD suck?

    Being formed of two Moving Averages, which are lagging by nature, it also lags big time behind price, especially in ranging periods, or in times when price moves strongly in one direction and immediately reverses. It just can’t keep up with the speed of price and it looks like a truck trying to compete with a NASCAR racing car. To put it simple, it’s just too slow, but maybe there is hope for it: let’s see why it doesn’t suck.

    Why and when doesn’t the MACD suck?

    I just told you that the MACD is too slow…well, this can also be a good thing sometimes: imagine you are in a strong trend that is about to retrace. If you were using a faster tool, that would get you out of the trend, signaling a trade in the opposite direction, but the MACD lines would just come closer together, signaling a momentum decrease, not a counter trade. The market conditions sometimes fake out even the slow moving MACD, making it cross, but that just shows us once again that there is no indicator that gives us perfect signals all the time.


  2. #2
    M.J
    M.J is offline
    Veteran Member M.J's Avatar
    MACD is, indeed, an essential tool for beginners.
    Moving averages r one of very important indicators in trading. They lag coz they r dependent on past data. So it is always advised to use them as an indication and not as a full system. MAs r only good if we use them in conjunction with other technical indicators.

  3. #3
    Master Member Bogdan G's Avatar
    Quote Originally Posted by M.J View Post
    MACD is, indeed, an essential tool for beginners.
    Moving averages r one of very important indicators in trading. They lag coz they r dependent on past data. So it is always advised to use them as an indication and not as a full system. MAs r only good if we use them in conjunction with other technical indicators.
    Yup, definitely agree with what you said and just like i wrote on the article, I just don't trust MACD by it's own. It gains more power if you use it to spot Divergence, but I still need extra price action confirmation.

  4. #4
    Specialist Member TAllen1429's Avatar
    Hi,

    Here is a strategy based on the MACD that I experimented with some time ago. I gave up in the end because of the problems encountered as described in the ‘Why does the MACD suck?’ section above.

    The specification for the design of the strategy was as follows:

    1. The design utilized the following technical indicators: the 10 period Exponential Moving Average (EMA10), the 20 period (EMA20), the 3 period (EMA3) exponential moving averages and the Moving Average Convergence Divergence (MACD).

    2. The design was applied to the EURUSD currency pair using the 1 hour trading chart.

    3. The direction of the current trend was identified by determining if EMA10 was higher than the EMA20 (go long) or EMA10 was lower than EMA20 (go short).

    4. If a bullish trend was detected and the MACD had crossed EMA3 in an upward direction then I waited for the bull candle to open & close above the EMA3.

    5. Once achieved, I opened a new long position when price was slightly above this candle.

    6. Similarly, a new short position was opened if the trend was bearish; MACD was lower than the EMA3; the bear candle opened and closed below EMA10 and price was slightly below this candle.

    However, usage showed that there was a very basic flaw with this design. Ideally, the best chance for obtaining a profit would be if a trade was entered shortly after the MACD/EM3 crossover. However, by the time the current design had often satisfied its entry conditions, price has already advanced significantly in its new direction.

    This often caused a problem because the new position was then very vulnerable to a serious price retraction, which did occur in many cases producing losses. This was not a good feature especially as the design had a risk-to-reward ratio of 4 to 1and simply could not afford to register many losses. After extensive research using different timeframes, currency pairs and setting, etc., I found that stop-outs were such common events that consistent profits were an extremely difficult feat to achieve. The odds were not in the favor of this design. So, I eventually gave up.

    Maybe someone out there can point out if I went wrong in anyway.

  5. #5
    Master Member Bogdan G's Avatar
    Quote Originally Posted by TAllen1429 View Post
    Hi,

    Here is a strategy based on the MACD that I experimented with some time ago. I gave up in the end because of the problems encountered as described in the ‘Why does the MACD suck?’ section above.

    The specification for the design of the strategy was as follows:

    1. The design utilized the following technical indicators: the 10 period Exponential Moving Average (EMA10), the 20 period (EMA20), the 3 period (EMA3) exponential moving averages and the Moving Average Convergence Divergence (MACD).

    2. The design was applied to the EURUSD currency pair using the 1 hour trading chart.

    3. The direction of the current trend was identified by determining if EMA10 was higher than the EMA20 (go long) or EMA10 was lower than EMA20 (go short).

    4. If a bullish trend was detected and the MACD had crossed EMA3 in an upward direction then I waited for the bull candle to open & close above the EMA3.

    5. Once achieved, I opened a new long position when price was slightly above this candle.

    6. Similarly, a new short position was opened if the trend was bearish; MACD was lower than the EMA3; the bear candle opened and closed below EMA10 and price was slightly below this candle.

    However, usage showed that there was a very basic flaw with this design. Ideally, the best chance for obtaining a profit would be if a trade was entered shortly after the MACD/EM3 crossover. However, by the time the current design had often satisfied its entry conditions, price has already advanced significantly in its new direction.

    This often caused a problem because the new position was then very vulnerable to a serious price retraction, which did occur in many cases producing losses. This was not a good feature especially as the design had a risk-to-reward ratio of 4 to 1and simply could not afford to register many losses. After extensive research using different timeframes, currency pairs and setting, etc., I found that stop-outs were such common events that consistent profits were an extremely difficult feat to achieve. The odds were not in the favor of this design. So, I eventually gave up.

    Maybe someone out there can point out if I went wrong in anyway.
    How did you identify EMA 3 crossing MACD? Was that average applied to the MACD sub-window? Where did your R:R ratio of 4 to 1 came from? That's huge...and MA crossing strategies are known for small stop losses. Maybe you waited for another candle to open&close after the one that corresponded to the crossover? Is this right?

  6. #6
    Rookie Member
    Quote Originally Posted by M.J View Post
    MACD is, indeed, an essential tool for beginners.
    Moving averages r one of very important indicators in trading. They lag coz they r dependent on past data. So it is always advised to use them as an indication and not as a full system. MAs r only good if we use them in conjunction with other technical indicators.
    I agree with MJ on this point. Any serious trader dont rely on just one tool for accuracy. It is like a country relying on one source of energy. ofcourse sometimes it is meant to fail you.
    Running at least two tools is ideal for success.

  7. #7
    Specialist Member TAllen1429's Avatar
    Hi Bodgan,

    Thanks for your comments.

    I am afraid that I used this technique many years ago and cannot remember all the details. I do recall downloading some free
    scripts that enabled me to run the EMAs and MACD in the same window although I have no idea what I did with them.

    I also remember that the R:R ratio was the best that I could achieve when back-testing for a selected time period of about 1-2 months. Probaly got lucky.

    However, it deteriorated dramatically over a lengthy time because of the retraction problem I described.

    The only reason that I introduced it was to highlight the delay problem.

    I totally agree with you that just using the MACD as a primary indicator just on its own is not a good idea. I was going through quite a learning curve at the time.

    I use much more advanced techniques these days. After trying my MACD idea for some time, I finally concluded that I had just discovered another method about
    how not to make money trading Forex - lol. But as some crazy once said: 'Cut windows and doors to make a room, it is the holes that make it useful'.

    Thanks for your feedback.

  8. #8
    Master Member Bogdan G's Avatar
    Quote Originally Posted by TAllen1429 View Post

    I use much more advanced techniques these days. After trying my MACD idea for some time, I finally concluded that I had just discovered another method about
    how not to make money trading Forex - lol. But as some crazy once said: 'Cut windows and doors to make a room, it is the holes that make it useful'.
    good stuff man
    I always thought that if I find the absolute worst indicator and just take the opposite direction than the one indicated by it, I'll be rich soon. I must tell you, I tested the MACD a long time ago with different settings than the default 12,26,9 and it gave around 80% bad signals. Unfortunately, I cannot remember those settings but if I do, I'll make sure to post them.

    All the best

  9. #9
    Specialist Member TAllen1429's Avatar
    Hi,

    I mentioned above that I downloaded free MT4 scripts which I have used to perform all sorts of amazing non-standard tasks. I thought I would let you in on how to access them just in case you have not done so already, especially if you are a novice.

    For example, I use one to produce pivot points, resistance and support lines for any timeframe. Another provides me if an audible and visual alerts whenever price hits a certain target. There are practically scripts for nearly everything.


    Here is how you can access them.

    1. Visit a site such as http://codebase.mql4.com/scripts

    2. There is a list on the left allowing you to view EAs, Indicators and Scripts etc.

    3. As there are many choices in each category, you will need some time to check them out. Well worth the effort though.

    4. Once you have found one you like, you can either download it or copy the code. Open the Metaquotes Language Editor under Tools in your MT4 platform.

    Select ‘new’ and choose the appropriate category, i.e. EA or script or indicator etc.

    Paste the code, add an appropriate name and save.

    You will then find your new tool in its category on the left of your platform. You may need to exit and then re-enter to access it.

    Hope the above is of help. I have made great use of these free tools over the years. I have found that if there is a particular task I want to do that is not available on the standard MT4 platform, then there is usually a free script that will allow me to perform it.

    Good luck with your trading.

  10. #10
    Master Member Bogdan G's Avatar
    Quote Originally Posted by TAllen1429 View Post
    Hi,

    I mentioned above that I downloaded free MT4 scripts which I have used to perform all sorts of amazing non-standard tasks. I thought I would let you in on how to access them just in case you have not done so already, especially if you are a novice.

    For example, I use one to produce pivot points, resistance and support lines for any timeframe. Another provides me if an audible and visual alerts whenever price hits a certain target. There are practically scripts for nearly everything.


    Here is how you can access them.

    1. Visit a site such as http://codebase.mql4.com/scripts

    2. There is a list on the left allowing you to view EAs, Indicators and Scripts etc.

    3. As there are many choices in each category, you will need some time to check them out. Well worth the effort though.

    4. Once you have found one you like, you can either download it or copy the code. Open the Metaquotes Language Editor under Tools in your MT4 platform.

    Select ‘new’ and choose the appropriate category, i.e. EA or script or indicator etc.

    Paste the code, add an appropriate name and save.

    You will then find your new tool in its category on the left of your platform. You may need to exit and then re-enter to access it.

    Hope the above is of help. I have made great use of these free tools over the years. I have found that if there is a particular task I want to do that is not available on the standard MT4 platform, then there is usually a free script that will allow me to perform it.

    Good luck with your trading.
    I think you've just opened Pandora's Box for all the novices here

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