Learn The Stock Market And How to Trade

I talked about MACD Indicators in a previous post highlighting the basics of stock trading with the MACD.  I’ve just about wrapped up a MACD excel spread sheet which lets you play with different moving average scenarios to see what fits your style on a specific stock or index.  If anyone is interested in this MACD excel sheet just give an email at bspohnholtz {AT} gmail dot com or leave a comment below. 

Anyways back to the post – there is two main reasons where the MACD indicator may not be your best friend and I want you to at least know about them so you can think about it in your trading strategy. 

The first one is the whip-saw affect.  The whipsaw happens when the oscillator shows bounces back and forth from buy and sell quickly.  This generally happens when the stock price is held in a range.  The MACD indicator is a lagging indicator so most of the tiny move is over before the indicator tells you about it.  The best plan to deal with whip-sawing is have a secondary driver for your buy and sell decisions agree, know when your in a ranged price in which I would use the MACD indicator, and know how the MACD acts specific to the equity you are trading.  Your last option would be to step into your trade so if you get whipsawed out you only lose a smaller amount, but as the trade turns favorable you add more to your position.  Whipsawing can eat you up in commissions and small losses quickly and need to be considered.

The second major problem is you can’t compare one MACD oscillator of one equity to another.  It is simply a subtraction of two moving averages and therefore has know comparison between different charts.  If you want to do this you should look into the percentage price oscillator which I’ll hopefully write about tomorrow.

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Related posts:

1. MACD – Moving Average Convergence Divergence
2. Relative Strength Index
3. Patterns on a Chart