In this article we developed one test, where we created one intraday profitable strategy, and than we and then we varied the values of the MACD settings parameters in several combinations. We wanted to see what is the best MACD settings for intraday trading.
As we know moving average convergence/ divergence or more commonly referred to as MACD for short is an indicator for trading which was created by Gerald and is used for various types of stock price technical analysis. It was developed in the last period of the 70s.
MACD has been designed to help reveal the changes in the trend duration, momentum, direction and strength of the price of stock. Oscillator or the MACD indicator is a three time series collection which is calculated with the help of data from historical prices, it is normally the price of closing. The three series are the divergence series that is a difference between the average and signal series. The other two are signal series and average series.
Signal Line Crossover
The signal line crossover of MACD shows that the acceleration direction is undergoing change. The average velocity of the MACD line when it crosses zero indicates that the direction is being changed.
How is the MACD Indicator Used for intraday trading or long term trading?
The tool is used for the identification of moving averages which indicates a new trend, if it is bearish or bullish. The main goal of trading is to find a new trend as that is where one will find the most money and have a piece of the pie.
MACD Chart
The MACD charts shows three different numbers being used for the settings. The first number is for the periods and it is used for the calculation of the faster-moving average.
The second number of the periods is used for the slower moving average. Finally, the third number is for the number of bars which would be used for the calculation of the moving average which would be used for the difference between the slower and faster moving averages.
Basic MACD settings
As an example, if one were to come across the default setting of the MACD parameters that are 12, 26, 9, these would be interpreted as:
Fast EMA period : The 12 previous bars are represented by 12 of the faster moving average.
Slow EMA Period : The 26 previous bars are represented by 26 of the slower moving average.
Signal SMA period: The 9 previous bars are represented by 9.
Vertical lines would be plotted and are referred to as a histogram. When it comes to MACD lines, there is a misconception. The 2 lines which get drawn do not reflect the price moving averages but rather are the difference of the moving averages between both of the moving averages.
When a slower moving average is plotted, the original line would be smoothened further, this helps provide one with a much more accurate line. The difference between the slow and fast moving average would be plotted by the histogram.
The divergence is the point where one would notice the two moving averages moving separately and the histogram will start to get bigger since the faster moving average would be moving away or diverging from the slower moving average.
The histogram would get smaller as the moving average start getting closer to one another. This is referred to as convergence since the faster moving average would be getting closer or converging to the slower moving average. This is the entire process of the Moving Average Convergence / Divergence.
Now, that you have understood what MACD does, it is time for you to know what it can exactly do for you.
MACD for Slow and Fast Moving Averages
As the fast line crosses under the slow line, a new downtrend would be identified. One would be able to notice that the histogram would disappear temporarily as the lines cross. It is due to the different in the lines when the cross is zero.
Furthermore, when the downtrend starts, the histogram would get bigger as the fast line would diverge or move away from the slow line. This is an indication of a solid trend. Let’s have a look at the examples.
Let’s look at an example for better understanding.
Our MACD intraday settings using Expert Advisor tests
Indicators :
1) MACD with several settings
2) Channel (we used our indicator but you can use any channel indicator for example Donchian channel).
3) Important level indicator. We have our indicator based on previous high and lows, but you can use Pivot points or Fib levels.
Rules :
We created several combinations and created BUY and SELL rules on 30 minutes chart :
BUY if we see bullish MACD cross or zero line cross AND price touch important level AND price is in bullish channel. Stop loss is last swing important level. Target next level.
SELL if we see bearish MACD cross or zero line cross AND price touch important level AND price is in bearish channel. Stop loss is last swing important level. Target next level.
In the first test we used 30 minutes chart and basic MACD settings. Than we repeated several tests with different combinations :
Trade with the help of MACD
As there are 2 moving averages that have different speeds, it would be quicker to react to the movement of price for the faster one as compared to the slower one. Whenever a new trend is discovered, it would be the fast line that would be the first to react and it would cross to the slower line eventually. When the fast line begins to diverge as the crossover starts, it would move away from the slower line and a new trend would be indicated as being formed.
Crossover Example of MACD
MACD does have a drawback and that is the fact that they tend to lag behind when it comes to price since it is just the historical prices average. One would expect a bit of lag as the MACD represents the moving averages of others and it is as such smoothed out by one another. Despite this fact, it is still one of the effective tools used by most traders.
Indication of Changes in Stock or Forex Trends
The MACD series with the help of different periods EMAs are able to indicate the changes in stock trends. Normally, the fast EMA would respond much quicker as compared to a slow one. Subtle shifts can be revealed in the stock trends with the help of the divergence series.
Mathematical Interpretation
The MACD is a measure that is filtered of the price which is the derivate of the input with regards to the time in signal processing. Velocity is the term for the derivate as used in technical stock analysis. It would estimate the derivatives just like how if it had been calculated. The difference in the time constants would be discovered with the use of filtering by the 2 low-pass filters.
Just as it would have been filtered by an EMA of a single low pass exponential filter, MACD can be seen to approximate the derivative through calculation. The time constant would equal to the sum of two filters time constants which one would multiply by the similar gain. The MACD derivative would be estimated through the approximate filtering of the equivalent of an EMA filter that is of low pass.
Furthermore, the average series can also be thought of as a derivative estimate, for further smoothing would be done by the additional low-pass filter. The difference of the average series and the MACD serried would represent a measure for the second price derivate in connection to the time. The estimate would have an additional gain factor which would be equaled to the filter constant of the signal and have an additional lag.
Classification
MACD could be classified as an APO (absolute price oscillator) as it does not deal in percentage changes but instead with moving averages of the actual prices. PPO or a percentage price oscillator would compute the difference of 2 moving averages of the price on the other hand and divided by a longer moving average.
The PPO will calculate the changes that are relative to price and the APO would show smaller levels of lowered price securities and greater levels of the higher price securities. When one compares the oscillator values of various securities, a PPO would be preferred especially for ones that are of different prices.
Long term trends are ignored by DPO (Detrended Price Oscillator) which are another member of the price oscillator family. Instead, short term patterns are emphasized.
Trading Interpretation
EMAs highlight the current changes of stock prices. The MACD is able to gauge the changes in stock trends by comparison of the different lengths of the EMAs. The difference of the average that is claimed by the MACD and the MACD series helps reveal the shifts in the direction and the strength of the stock trends. It might even be necessary to correlate the indicators of the MACD to signals such as the RSI power.
There are some traders which would attribute importance to the MACD line that crosses the 0 axis and the MACD line that crosses the signal line. Importance is also due to the disagreements between the difference line or the MACD line as well as the stock price.
Signal-Line Crossover in our tests
It happens when the average lines and the MACD cross meaning that when the divergence would change its sign. The interpretation of this would be that it would be recommended to buy as long as the MACD line crosses over the average line. These events indicate a trend in which the stock would accelerate towards the crossover.
False Signals in our tests
It is possible for there to be false signals just like any other forecasting algorithm. It would be prudent to apply filters to the signal line crossovers. Different approaches are used by analysts to find the right results.We choosed our trading rules. You can make any test using its own strategy. Each strategy will have false signals.
Thoughts
We think that the best success we can get using standard basic MACD intraday settings because most “big dog” traders and institutions use this settings. In our test we got similar results but basic settings made the best results.
Fxigor