Last update: July 2021

I came across a great question in the Clubhouse regarding the MACD indicator. It was one of the first chart studies I learned, and I used it extensively in my early days.

Over time, however, my interest in it waned, and I ultimately abandoned my once-beloved MACD. Here’s why.

My General Philosophy on Indicators

My initial foray into chart reading had me heavily reliant on both the MACD and Stochastic. They provide potential buy and sell signals, among other things, and there’s no easier hook to a rookie trader than “buy when this line crosses that one!”

It’s simple to understand and allows you to sidestep any rigorous analysis of your own. Unfortunately, while it’s better than nothing, I’ve found superior timing tools that rendered the MACD unnecessary.

These days the only indicators accompanying my beautiful candlestick chart are moving averages, volume, ATR, and implied volatility (when trading options). On a side note, I’ve already crafted what I consider my robust guide on chart reading in the June 2020 edition of the Trading Justice Newsletter.

My general philosophy on indicators is that the lion’s share of them are redundant. They are a derivative of price and thus re-hash the message that veteran traders can already read on the candlestick chart.

I eventually removed MACD and Stochastic from my charts because I got more comfortable reading price action. That includes trend, support/resistance, and momentum. It’s all broadcast in the candlesticks – plain as day for those that know what to look for.

MACD

The MACD is as reliable an indicator as any, I suppose. That doesn’t mean every signal works, though. Besides, I think it’s foolish to use any indicator in isolation. You must view MACD signals in combination with price trend, support/resistance, volume, and the like to get the full picture. Read the hierarchy of charting section of the aforementioned June 2020 newsletter for more details.

Rather than reinvent the wheel, I’m sending you to the MACD explanation over at Stockcharts.com. It runs you through how the study is calculated and the various signals used by traders.

Options Report Examples

Let’s look at how the MACD plays into a few of this weekend’s Options Report picks.

ICE, HCA, and STZ all have bull retracement patterns and are potential buys if they rise above Friday’s high. In all three cases, the MACD just crossed down, giving a sell signal. It will take a good 3 or 4 up days before it crosses back up and provides a buy signal. Do you see how lagging the signal would be? I’d be willing to buy all these tomorrow if they trigger.

Because using candlestick triggers provides much quicker entries than the MACD, I find the crossovers mostly useless.

How about momentum? When the MACD makes a higher swing high to confirm the stock price carving out a higher swing high, it suggests the uptrend is increasing in momentum. But 99% of the time, I can already spot this by looking at the pivots’ relationship.

Look at Target (TGT), for instance. It’s on the report as a potential high base or bull retracement pattern. The MACD is forming a higher swing high, but can’t you tell that the uptrend’s momentum is increasing by looking at the amazing upswing we just had? I can. Thus, the MACD doesn’t tell me anything I didn’t already know.

I could list a dozen more examples, but for me the takeaway is clear. I’ve reached a point in my chart reading skills that doesn’t require secondary indicators.

That said, if you find using the MACD helpful in confirming things you think you see in the chart, then use it.

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