Let's take a trip off the beaten path. We'll administer some necessary medicine to a revered technical indicator - the moving average convergence divergence(MACD). Enough articles have been written about the MACD to depopulatehalf the world's rain forests, but little has been said about thedownsides of using this very popular tool. In short, the MACD doesn'twork as well as some say it does. It's a glorified moving average,and it's weak at forecasting price direction. In this article we'llcover the controversial perspective of those who spurn the use of thisprevalent indicator and what can be used in its place. (For backgroundinfo, see Trading The MACD Divergence, Keep An Eye On Momentum and Moving Average Convergence Divergence - Part 1 and Part 2.)
The MACD's Seduction
When applied over a long time frame, the signals generated by a given moving average will often seem very random, but a moving average can be a seductive indicator. An exponential moving average is just advanced enough to entice the delight of the technically-minded, but is not so arcane as to perplex the rest of us.
Andalthough anyone could program charting software to reprint the physicalseparation between any two moving lines, so far, only the MACD holdsthat claim. This is an attribute that fascinates many traders, while the MACD histogram provides an added air of sophistication.
Thetrue allure of the MACD, however, is that it requires interpretation,in particular with regard to convergence or divergence fromupper-screen price action. According to critics of the MACD, this alonehas guaranteed its perpetual placement in the pantheon of trading studies - once an idea can be interpreted, it can be elevated to mystical status.
The Good Side of the MACD
Supportersof the MACD argue that there have been countless times when thevenerable work horse presaged a profitable move. They would also arguethat the MACD is a tool that can be used to quickly gauge theshort-term direction of an asset's momentum, without the need for the skills of a professional trader. Readingsabove 0 indicate that the short-term moving average is acceleratingfaster than the longer-term moving average, which most traders wouldview as a sign that the short-term upward momentum is increasing. Theopposite is true when the MACD values are below 0. Having an outlook onfuture momentum, as predicted by the MACD, allows traders to havegreater confidence about when they enter a given trade because the underlying momentum is working in their favor.
The Ugly Side of the MACD
However,it is possible that the MACD's success is a result of chance - afterall, even a stopped clock is correct 730 times each year. When used asan entry signal to the lush pip-filledworld lurking just beyond the hard right edge of our computer screen,the MACD fails time and again - just what we should expect from anymathematically averaged smoothing of past price action. If only wecould trade in reverse!
Those inclined to count how many pipscan fit on the head of a pin might wish to tweak their MACD in anattempt to make it even more predictive. This is a bit like feeding avariety of performance enhancing drugs to a snail and watching to seewhether its meandering trail will bend just a little more to ourliking. But would it help us to know where the snail is going next? No,we won't have a clue, and the snail probably won't either.
TheMACD uses 26 periods as its farthest backward-looking value. On a15-minute chart, 26 periods total six hours and 30 minutes. Fifteenminutes goes by pretty fast. There are 96 such periods in a 24 hour day- 480 in a five-day trading week. Therefore, in the grand scheme ofthings, a single period of 15 minutes is really just noise.
Let's say it's 8am New Yorktime and Bob is watching the 15 minute chart. What is the MACD doing?Still paying attention to what happened back at 1:30am, when New Yorktraders were sawing logs. Nevertheless Bob is sitting there trying toget pips based on where he thinks the market is going in the next 15 or30 minutes. He wants pips right now. What does he care about where theprice was 6.5 hours ago? His favorite pair may have traded above thedaily pivot during the Asian session, taken a bounce off strong-longterm resistance on the London open and dropped like a rock right into the New York session.
Bob is trying to divine what the Big Boysare likely to do in the next 15 to 30 minutes, which means he needs tounderstand what they were thinking 15 or 30 minutes ago, not in themiddle of last night!
In the end, the performance of moving averages and indicators based on moving averages will always be, well, average. So let's move on.
The Tools of the Trade
Whatcan we use to tell where price is going next? The answer is: nothing.There is nothing in existence that can tell us where price is goingnext. But there are a few simple tools that can tell us where price is likely to go next - perhaps as often as 80% of the time.
These tools include:
1. The trusty trendline
2. The reliable pivot point
3. The common candlestick
Thesetools are not sophisticated and require no divinity degree tointerpret. In fact, they are not subject to interpretation. Let's takea closer look. Using a demo account remove all the indicators except for support and resistance (trend) lines, pivots and candlesticks.
Here is a short list of what you won't need if you follow this way of investing:
1. Moving averages
2. MACD
3. Stochastics4. Parabolic SARs5. Bollinger bands
The Candlestick Will Light Your Path
First and foremost, learn to recognize candlestick action. Learn all you can about the hammer, the star -the tower of strength. They are even better when they appear at pivotpoints or trend lines (for added epiphany think of trend lines astilted pivots). Learn to recognize that price is a fickle thing thatcan change its mind faster than Hollywood actors change relationships.The price moves like the people who move it. (For more insight, see The Art Of Candlestick Charting - Part 1, Part 2, Part 3 and Part 4.)
When candlestick reversalsoccur at places where fear and greed occurred before (tilted support orresistance = trendlines), or at anticipated price levels (horizontalsupport or resistance = pivot points), we have an extraordinarily highprobability trade.
Price zigs. A hammer at key support! Price zags. An evening star following a double top at key resistance! And where's the MACD? It's still meandering through the charts like a picturesque mountain stream.
Conclusion
Inthe time it takes a MACD devotee to get out their compass andprotractor and divine where price is heading next you could already bein and out of a profitable trade or two. It may go against the acceptednorm, but if you give it a try you may just find yourself on a brighterpath to profit.
by Gordon Philips, (Contact Author | Biography) |
发表于 2009-12-31 07:10
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