Technical Analysis: pros and cons of MACD | Forex4you (2024)

FAQs

What are the advantages and disadvantages of MACD? ›

Advantages and disadvantages

One of the biggest advantages of the MACD is that it's both a trend and momentum indicator. However, like all other technical indicators, the MACD isn't perfect. Its main flaw is that it gives the signals later than the price action itself.

As a versatile trading tool that can reveal price momentum, the MACD is also useful in the identification of price trends and direction. The MACD indicator has enough strength to stand alone, but its predictive function is not absolute. Used with another indicator, the MACD can really ramp up the trader's advantage.

It can provide false reversals. Sometimes reversal signals shown by the MACD divergence does not mean a significant reversal would happen. It could mean that a temporary pause or sideways move is underway before the trend continues. Therefore, MACD cannot forecast all reversals.

MACD is used by technical traders in stock, bond, commodities, and FX markets. Some MACD strategies include the histogram, the crossover, the zero-cross, the money flow index, and the relative vigor index. One of the biggest risks of the MACD is that a reversal signal can be a false indicator.

It can help you identify trends, momentum, reversals, and trading signals in any market and time frame. In this article, you will learn what MACD is, how it is calculated, and what are the benefits of using it in your technical analysis.

MACD is a technical indicator designed to help investors identify price trends, measure trend momentum, and identify acceleration points to fine-tune market entry timing (whether you're buying or selling).

The Schaff Trend Cycle (STC) is a technical analysis indicator used in trading and investing to identify trends and generate trading signals. The STC indicator helps to identify trends in a smoother and more responsive manner compared to traditional MAs and even under certain parameters, the MACD.

MACD with PRC has a 90% success rate. A stock's moving averages should at least approach one another, if not cross, before you act on that stock. MACDs rely on three exponential moving averages instead of one or two. Look for patterns where the three moving averages come together closely.

The strategy is to buy – or close a short position – when the MACD crosses above the zero line, and sell – or close a long position – when the MACD crosses below the zero line. This method should be used carefully, as the delayed nature means that fast, choppy markets would often see the signals issued too late.

When it comes to strengths and weaknesses, MACD is a momentum indicator that is better at identifying trend reversals. On the other hand, RSI is better at identifying overbought or oversold conditions. However, combining both indicators can provide a more comprehensive view of the market.

Why is MACD important in technical analysis? ›

MACD is a momentum indicator, which follows trends and belongs to the oscillator family of technical indicators. It permits you to: According to the relationship between two moving averages, determine the current trend direction (bullish or bearish) and forecast where the price is more likely to go.

The Best MACD Settings for 1-Hour Chart

For an hourly chart, stick with the default MACD settings of 12, 26, 9. Monitor the signals generated by different MACD settings when trading on a 1-hour chart to optimize your strategy. It gives you a good view of the market momentum and trend within the day.

A third way to avoid false signals is to apply indicators and oscillators to the chart patterns and trends. Indicators and oscillators are mathematical calculations that use price and volume data to generate signals and measure the momentum, direction, and strength of the market.

The strategy is to buy – or close a short position – when the MACD crosses above the zero line, and sell – or close a long position – when the MACD crosses below the zero line. This method should be used carefully, as the delayed nature means that fast, choppy markets would often see the signals issued too late.

This makes it accessible to both novice and experienced traders and allows for easier interpretation and confirmation. For this reason, many consider it among the most efficient and reliable technical tools. Though it is not useful for intraday trading, the MACD can be applied to daily, weekly, or monthly price charts.