As more and more technical indicators become more taught, followed...and misunderstood I wanted to geta contrarian view of the MACD. I asked Mark Young from ChartSmarts and Wall Street Sentiment to do that for us. I've known Mark for a while and can attest to his knowledge so please take some time and read the article below and comment as you see fit! You can also learn more about MACD HERE.
Throughout my 28 year career as an investment professional, I've learned that you've got to do things differently if you expect to beat the averages. More importantly, I've learned that one has to separate oneself from the herd if one wants to avoid being trampled by them. As such, I'm always looking for an edge to set my trading apart.
With that approach in mind, I'm going to risk being mistaken for an investment "guru" cliche' and tell you that I've got a secret "they" don't want you to know: The most popular technical indicator available today-- is a fade.
The single most followed technical indicator is the MACD. It's probably the first tool an investor or trader is ever presented with. It's probably the most easily understood, too. As such, and like most popular investment tools, it has almost completely lost its utility, and I have discovered that the MACD is more effective and more profitable when used to fade signals, rather than to take them.
Take a look at this simple chart of the weekly MACD (using the StockCharts.com default settings). Now, note that nearly every cross-over Buy and Sell on this chart was a fade within a week or two.
It's uncanny. Not perfect, not usually long term, and not always easy to trade, but almost always there was an opportunity to make money trading against the signal in pretty short order, even if it's going against the larger trend.
What that means is that any "system" that relies upon MACD cross-overs is likely to lose money. That’s why, with a little trading expertise and some fine tuning, the few traders who know this little gem can winnow out some fine profitable trades when others are suffering draw downs over and over.
This approach can be used for almost any trading tool that has a wide following. It works on multiple time frames, too. This is especially true if there is a long history of profitability that neophytes can build their confidence with. If less sophisticated traders can be predicted to go long or short reliably, there's a good chance that the trading "sharks" are going to exploit that.
If we can identify what the herd is doing or is likely to be doing, then we can avoid the fleecing that they'll be subjected to and quite possibly even manage to improve our equity lines.
Founder, Traders-Talk.com, home of the longest running technical analysis discussion forum on web.
12 thoughts on “Breaking Away From the Herd: A Contrarian View of the MACD”
What I'm saying is that you can trade shorter term against the MACD Cross-over. As others have noted, the MACD still has some utility, but you can generally trade in exact opposition to the most simplistic application and do OK.
Sometimes, I trade for a "fake out" on some more obvious triangles. Note, I'm not part of Adam's "Trade the Triangle" service, but I am editor of ChartSmarts which does a lot of work with triangles and the like. They do work (and pretty well), but sometimes you have to look for an obvious angle to fade.
I sincerely hope I didn't confuse anyone. I tried to keep it simple. This piece is a free public offering on someone else' blog. It is intended as a thought starter and a jumping off point. I tend to be much more voluminous in my publications or when I'm otherwise being compensated by people with a demonstrated interest and adequate expertise to exploit the ideas that I'm discussing. I don't give away all of my best stuff for free. Do you? 😉
EXTREMELY good point! The most neglected aspect of trading is stop placement (and money management). Part of that is because it's boring and not as exciting as "picking the top" or hitting big winners. The fact of the matter is that most good traders make/keep more through good money management than through elegant analysis. I for one would love to see more attention directed to proper stop placement and money management.
In fact, anyone who would like to offer their thoughts on money management should feel free to trot by Traders-Talk.com and post on the Fearless Forecaster board. If we can get enough quality discussion going, we'll archive it in our Investors' University area.
FWIW, I use cross-overs as signals unto themselves with merely a short-term trend indicator and a volume overlay. Obviously, though, any indicator can be greatly enhanced with multiple filters.
Best to all,
I am not making a great secret over the system which I trade. I use the Bill Williams's "Chaos" Theory on the time frames of 4 hours or more. I do not place stop-loss orders. Instead, I use the delayed orders in the direction opposite to my opened position. The reason why I am not afraid to reveal the system which I use is because it does not matter what system you trade. The most important is the mentality of the trader. And it comes only with the experience - earned and lost money. Previously, I was subscribed to a lot of advisement services and newsletters. Then I realized that I should stick to what I am comfortable with and excel in it. Now I only keep the "Morning Newsletters" from the Marketclub. I found them the most convenient among others. So I store and visit them when I do the review of the trades in order to understand the price action. I do not read the analytics though - just date, time and event information. All thechnical indicators will give you just signals. But understanding the price action is the key to the successful trading, because, there is no such system in the nature which clearly demonstrates when the trend stops and when it starts. However, absence of that system allows us to make money; otherwise all money would belong to the person with the most powerful computer 🙂
Absolutely. The important thing to remember is that markets are not random, they are CHAOTIC.
If you trade a lot, you can see the neural net guys key in on a pattern that has worked well, and it'll turn into a fade for a while. You can literally watch it happen. Then, after a while, the pattern will start working again, bit by bit.
I think the view over simplifies the use of the indicator. The first few signals are shown with obvious bearish divergence on the MACD. In this way, the MACD filters itself. The rest of the chart is clearly in strong a downtrend, which is more important than a buy signal on the MACD until there is bullish divergence.
However, you clearly should have a filter for the MACD, no matter which way you trade it. I personally use On Balance True Range to filter oscillators with reliable results.
I use the MAC D to follow trends, alot of software is based off the MACD
I cant tell you how many times I have heard the phase "use a tight money stop". I now hear it a lot on your computer voice updates. Anytime I have asked someone to define what a tight money stop is they say it depends on your trading style. To me this is a non answer. What if you don't have a trading style. There has to be a range of mathematical values like 1 to 3% or what ever.
If people are subscribing to an investment site for advice they are usually not self directed traders. I think a short tutorial on how to place tight or other kinds of stops would be usefully since controlling losses is one of the major criteria in making money in the markets.
Article does not contain any important information, except the well-known statement that market makers fade out the popular MACD signals. It seems to me that the article is aimed to confuse even seasoned reader even more. To begin with, the trade would not be possible should the market maker fail to fade the desire of the independent trader: in each trade there is always a buyer and a seller. Secondly, the MACD parameters on the chart are for some reason changed from defaults to some wierd combination without explanation: why would not use 5,34,5 or any other combination. Thirdly, additional confusion is added by not mentioning that there should be a filter for the trend strength. It is a common knowledge that there is should be at least one indicator which filters trending market from the trendless, because MACD behaves differently in two different types of market. Fourthly, there are no any constructive recommendations on the trade system, except "That’s why, with a little trading expertise and some fine tuning, the few traders who know this little gem can winnow out some fine profitable trades when others are suffering draw downs over and over." Lack of these details in the articles is unexpected from the author who claims to have 28 year investment professional experience.
I loved the author's in depth analysis of this Anti-MACD fade trading technique. I want to see the author's response to Vladimir's technical points. Vladimir is definitely not a member of the herd. Vladimir is thinking for himself. I love it. Let's see more independent thinkers.
You could say the same thing with regard to the trade triangles. There are 7 green triangles and 6 are followed by a dip a week or two later; and 4 of these are not followed by a sell trade triangle before the fall had already occured. In adition, 5 out of 8 sell trade triangles are followed by a few weeks of market advances.
So one would also do better by being a contrarian on your trade triangles at least in the short run.
The real point to be made here is that no one technical signal is accurate and no one signal should be used to buy and sell anything.
I think what they are saying is to do the opposite of what the MACD is telling you,am I thinking right or wrong??
yep, nice to see someone else is using it for the fade as well. Bollinger bands help as well if you adjust the range to suit your trades.
Nice short, sharp and for me very relevant pointers.
Thank you Mark and Adam.
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