Candle Loses More Light Than the MACD

Supporters of the MACD argue that there have actually been plenty of times when the venerable workhorse presaged a rewarding move.

The MACD's Seduction

These devices include:

1.

The Good Side of the MACD

Right here is a short list of what you won'' t demand if you follow this method of investing:

The Ugly Side of the MACD

1.

Those inclined to count how many pips can fit on the head of a pin might wish to tweak their MACD in an attempt to make it even more predictive. This is a bit like feeding a variety of performance enhancing drugs to a snail and watching to see whether its meandering trail will bend just a little more to our liking. But would it help us to know where the snail is going next? No, we won't have a clue, and the snail probably won't either.

The MACD uses 26 periods as its farthest backward-looking value. On a 15-minute chart, 26 periods total six hours and 30 minutes. Fifteen minutes goes by pretty fast. There are 96 such periods in a 24-hour day—480 in a five-day trading week. Therefore, in the grand scheme of things, a single period of 15 minutes is really just noise.

Let's say it's 8 a.m. New York time and Bob is watching the 15-minute chart. What's the MACD doing? Still paying attention to what happened back at 1:30 a.m., when New York traders were asleep. Nevertheless Bob is sitting there trying to get pips based on where he thinks the market is going in the next 15 or 30 minutes. He wants pips right now. What does he care where the price was 6.5 hours ago? His favorite pair may have traded above the daily pivot during the Asian session, taken a bounce off strong-long term resistance on the London open and dropped like a rock right into the New York session.

Bob is trying to divine what the Big Boys are likely to do in the next 15 to 30 minutes, which means he needs to understand what they were thinking 15 or 30 minutes ago, not in the middle of last night!

In the end, the performance of moving averages and indicators based on moving averages will always be, well, average. So let's move on.

The Tools of the Trade

What can we use to tell where price is going next? The answer is: nothing. There is nothing in existence that can tell us where price is going next. But there are a few simple tools that can tell us where price is likely to go next—perhaps as often as 80% of the time.

These tools include:

1. The trusty trendline
2. The reliable pivot point
3. The common candlestick

These tools are not sophisticated and require no advanced degree to interpret. In fact, they are not subject to interpretation. Let's take a closer look. Using a demo account remove all the indicators except for support and resistance (trend) lines, pivots and candlesticks.

Here is a short list of what you won't need if you follow this way of investing:

1. Moving averages
2. MACD
3. Stochastics
4. Parabolic SARs
5. Bollinger Bands

The Candlestick Will Light Your Path

First and foremost, learn to recognize candlestick action. Learn all you can about the hammer, the star—the tower of strength. They are even better when they appear at pivot points or trend lines (for added epiphany think of trend lines as tilted pivots). Learn to recognize that price is a fickle thing that can change its mind faster than Hollywood actors change relationships. The price moves like the people who move it.

When candlestick reversals occur at places where fear and greed occurred before (tilted support or resistance = trendlines), or at anticipated price levels (horizontal support or resistance = pivot points), we have an extraordinarily high probability trade.

Price zigs. A hammer at key support! Price zags. An evening star following a double top at key resistance! And where's the MACD? It's still meandering through the charts like a picturesque mountain stream.

The Bottom Line

In the time it takes a MACD devotee to get out his or her compass and protractor and divine where price is heading next, you could already be in and out of a profitable trade or two. It may go against the accepted norm, but if you give it a try you may just find yourself on a brighter path to profit.

Tip: For investors’ reference only, it does not constitute investment advice. Financial investment products have high risks and are not suitable for every investor. If necessary, please consult a professional consultant.