MACD Indicator: One of the most used Technical Indicators used through the world. Stocks, FOREX, traders use MACD all over.

I should point out that MACD is used a lot by many traders so if you are going to use only one technical indicator I would probably use MACD if I could not use anything else.

But it does have its own inherent problem of being a lagging indicator. If you are going to trade the crosses on the MACD histogram I would wait for at least one bar into the break of the crossing of the EMA's.

For shorter time frames I would go as far as waiting multiple bars of the histogram. How many depends entirely on how short of a time frame you are trading. If you are not a day trader one bar into the break of a cross may be fine if you are trading on daily charts.

The following MACD indicator settings in the images are set with the standard 12, 26, 9 EMA's.

Click to enlarge MACD Indicator image in its own window

Let's go through some of the good points, and bad points, of the MACD indicator.

Mind set: We are not going to hang onto a position that goes into loss any longer than we can tolerate with a predetermined amount we are honestly willing to lose.

Never enter a trade without a plan. Plan for losses. Look for reasons not to enter a trade, you lose no money staying out of the stock market. Profits will come.

Open, that image up and lets take a walk through the designated numbered areas. This is a daily chart of Apple and chart are by TD Ameritrade's Thinkorswim platform.

The blue bars in the background of the chart represents volume of the shares being traded, and we are going to take the volume into account as everyone should.

1. Sell cross. Weak volume.
2. Buy cross. Good volume, but pay attention to the gap.
3. Buy cross. Weak volume, stock goes sideways for a few days.
4. Weak sell cross. This one definitely makes a person question the cross.
5. Strong buy cross. Price soon breaks previous high.
6. Weak sell cross. You are going to lose money unless you sell in profit.
7. Strong buy cross. If you rode from here you would had made a tremendous profit.
8. Sell cross. This signal was devastated by a gap. Potentially news driven.

You want to sell while you are in profit, so if the market looks like it's going to turn around against you, jump ship. If you are already in a loss and see no indication of an immediate return to profit, jump ship. You can let losses run, or you can make a decision to end your losses and live to trade another day.

Let's take an alternative look at the designated numbered points in the MACD Indicator image above.

1. Volume never got above where it had previously seen highs. This was a weak sell cross. You would had made some money if you sold within the next 24, maybe 48 hours.
2. Volume was terrific, but this cross was due primarily to a gap. This is not a reliable trade signal, but you would had made money if you sold sometime within the next couple days.
3. This is a more reliable MACD buy cross than #2. But volume is even lower than #1. You would had made some money if you sold within the next few days.
4. Volume is slowly starting to pick up pace. But, there is a minor bullish gap right after the sell cross signal. This is just the way it goes sometimes, that is why you must have a plan in regards to profit losses. If you held onto your sell, you would had eventually made a good deal of money. But if you hold onto your losses, you are setting yourself up for disaster in the long haul.
5. This is beautiful. Minus a gap related volume spike (#2), #5 is the most volume we have seen on this chart yet. The best buy cross signal on this chart so far.
6. Looks like a good cross sell signal, but it is a little late to the party. Eventually retests the previous high, before continuing down where MACD said it would go to begin with. You could of ended with a loss depending how you played this MACD signal.
7. Looks like a good bullish buy signal, but you could easily lose money here as well. We don't want to hang onto losses, so if we didn't already take what little profit we had on the table down the road with us, we have cut loose with a small loss, only to be incredibly disgusted with ourselves in the following days to come.
8. If we weren't already in the big run up to MACD signal cross #8, we get a weak bearish sell cross signal only to have our teeth kicked in further by a decently large bullish gap immediately after signal #8.

You are not going to profit simply because you are using any technical indicator. You must take a look at why you are entering a trade, and more importantly, why you want to stay out.

As we have seen with the MACD Indicator image there are plus sides, and negative sides to using MACD. Yes, it can be profitable using MACD. And yes, you can lose your money using it if you throw money at every MACD signal you see.

You should take a look at volume, the weaker the volume the less likely a MACD signal is going to be profitable. Be wary of entering a trade on a MACD signal that has the volume that dwarfs previous days of volume. An intense amount of volume can be profitable but for day traders primarily. And be on the lookout for gaps that may manipulate a MACD signal rendering it invalid or false.

I hope this has given you some insight about how to trade using MACD.

But there is more!

Are you ready to learn how to trade MACD divergence?

Technical Analysis Technical Indicators