Best MACD Signals for Momentum Traders

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Best MACD Signals for Momentum Traders

To trade momentum, also known as the Moving Average Convergence Divergence (MACD), you must have the mental fortitude to hold steady when things are going your way and to wait when goals have yet to be met. Momentum trading requires a tremendous amount of discipline, a rare personality trait that makes short-term momentum trading one of the most difficult ways to profit. Some strategies are more effective than others in creating a personal strategy for success in momentum trading.

Techniques for Entry

Dr. Alexander Elder’s impulse system, which utilizes one indicator to evaluate market inertia and another to measure market momentum, was meant to discover optimal entry moments for trading on momentum. You may use an exponential moving average, or EMA, to determine uptrends and downtrends in the market to identify market inertia. Inertia supports the bulls when the EMA increases, and it benefits the bears when the EMA falls. The bulls gain strength as the slope of the MACD histogram increases. When it falls, the bears get stronger.

When both the inertia and momentum indicators move in the same direction, the system produces an entering signal, and when these two indications diverge, the system issues an exit signal. If both the EMA and the MACD histograms are pointing in the same direction, inertia and momentum are collaborating to create unambiguous uptrends or downtrends. When both the EMA and the MACD histograms rise, the bulls have taken control of the trend and it is accelerating. When both the EMA and the MACD histograms fall, the bears take control and the downtrend becomes dominant.

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Refining Entry Points

In a precise trading approach, the preceding techniques for identifying market inertia and momentum are applied to determine entry opportunities. If your time of comfort coincides to the daily charts, you should look at the weekly chart to establish the market’s relative bullishness or bearishness. On the weekly chart, utilize the 26-week EMA and the weekly MACD histogram to establish the market’s longer-term trend.

Once you’ve identified the long-term trend, utilize your regular daily chart to hunt for trades just in the direction of the long-term weekly trend. You may wait for the right signal from your daily comfort zone by using a 13-day EMA and a 12:26:9 MACD histogram.

When the weekly trend is positive, both the 13-day EMA and the MACD histogram should be positive. A strong buy signal is sent at this time, and you should take a long position and hold it until the buy signal fades. When the weekly trend is down, wait for both the 13-day EMA and the MACD histogram to flip down on the daily charts. This will be a strong indication to go short, but you should be prepared to cover the short position as soon as your purchase signal vanishes.

Techniques for Exiting Positions

The main reason momentum trading may be effective in both turbulent and trending markets is because we are looking for short-term momentum rather than long-term momentum. Within any given week, all markets trend, and the best stocks to trade are those that consistently demonstrate significant intraday patterns. With that in mind, remember to get off the momentum train before it arrives at the station.

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As previously stated, after you have spotted and entered a strong momentum trading opportunity (when both the daily EMA and the MACD histogram are rising), you should quit your position as soon as either indicator begins to fall. As the positive momentum starts to diminish, the daily MACD histogram is frequently (but not always) the first to turn. This turn, however, may not be a real sell signal, but rather the consequence of the disappearance of the purchase signal, which for the impulsive system is sufficient impetus to sell.

When the weekly trend is down and the daily EMA and MACD histogram decrease while you are short, you should cover your shorts as soon as either of the indicators stops delivering a sell signal, or when the most rapid section of the downward momentum has ended. Before the trend hits its ultimate low, this is the moment to sell. Unlike a properly selected entrance point, exit points need rapid actions at the exact time when your recognized trend looks to be reaching its conclusion.

The Bottom Line

As you may have guessed, the impulsive method of trading on momentum is neither a computerized or automated procedure. This is why human discipline continues to have such a strong influence on your level of success in momentum trading: you must be steadfast in waiting for your “best” chance to begin a position, as well as nimble enough to retain your concentration on identifying the next exit signal.

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