I'd like to understand better the mechanism behind the MACD. I know what a MACD is and how it is calculated, but I want to understand how it is useful in trading, e.g. what does it say about the market. How does plotting the difference of two moving averages as an oscillator give me insight to the structure of the market? There must be a reason for its continued use by many traders (including successful ones). Please note: I'm not looking for anyone's opinion about the usefulness of the MACD or of technical indicators in general--that's a different topic. I just want some objective, logical, mathematical discussion about this indicator. Also, I'm not looking for anyone to discuss their personal "setups," unless you feel inclined to do so. Thanks
1) With any indicator, and especially anything moving average based, you become a "slave" to the duration of the average(s) all the while the market can do whatever it wants in real-time. 2) Ideally, your indicator is optimized to the present time, not the distant past. 3) Moving averages work "well" in trending markets and not as well in sideways markets.
While I respect your opinions, this does not answer my questions about the mechanism by which MACD works. I'm not concerned at this point with the philosophy of using indicators versus other techniques, or in what markets said indicators it "work well." To rephrase what is asked in my original post: What information does the MACD present about the structure of the market and the movement of price, particularly from a mathematical perspective?
The MACD is a highly range bound indicator. It totally loses its effectiveness at major up or down moves on a chart. It is a fact & common knowledge that the MACD will "stick" to the top or bottom of its range during times of high volitility and liquidity. This being the case, what consistent useful information could the indicator possibly possess about the structure of a "chart" (the only relevance since we do not trade markets we trade charts) and the movement of price. From a mathematical prospective, being a range bound indicator renders the consistency at well below average.
MACD is popular with posted charts because when it says Buy or SELL, that's the very beginning of the move. It's impressive to see an entire move captured. If you have a bias on any particular instrument, you can watch for the MACD to indicate entry. When it gives a signal, the move will be very young and if you are right you can capture it from the very beginning. The downside is that if you act based only at MACD, you are going to get whipsawed something terrible. It's so squirrelly that it indicates beginnings of many more moves than there are moves.
you should be able to find internet articles or books by Gerald Appel, the guy who invented MACD. http://en.wikipedia.org/wiki/MACD
go back about 18 -24 months in the es journal and watch how jsspmk used it, he showed his entries, exits and charts,i think he watched about 3 timeframes at once using macd and was able to catch a lot of moves
amazing ..... i have no idea what you're talking about in your brief review. very impressive!! i am going to find out more about your methods.
A long time ago I was credited with the Wikipedia entry on MACD. One of the most humorous applications of MACD was called SPM; it was a failure as you can imagine.