David Adams

ES Emini: Often Misused, the MACD Can Put Money in Your Pocket



Posted: Friday, November 06, 2009

by
http://emini-maven.com/wordpress/

I use a variety of indicators on my trading charts. It is important to me to be able confirm short term trends through the use of multiple variables. The middle indicator on all of my charts is always the MACD. MACD stands for Moving Average Convergence/Divergence Indicator. It is an indicator I have used for much of my emini trading career, so you could say we have a fairly intimate relationship. In my trading, I have found the MACD to be helpful, but not a primary indicator.

The MACD is unique in that it is a trend velocity indicator and gives me an excellent viewpoint on the intensity of a trend, both as the trend gains strength and as a trend wanes. The indicator itself is simply the pointspread between two exponential moving averages. I use a 5 and 35 as my time periods when plotting the MACD, and I will surely admit that my time period settings are different than most traders. I also plot a 5 period simple moving average on the MACD, which gives me a look at an extremely short moving average to guage the ultra near term moves in the market.

So why concern myself with the velocity of the trend?

For me, I am interested in the this rate of change indicator to give me some insight into the strength of the current short trend. I cautioned early in the article not to use the MACD as a primary indicator, and I think this is good advice. In short term trading you will find yourself whipshawed in and out of trades and pile up small losses. Gerald Apel, the inventor of the MACD, cautions against this in several of his writings. So I use the MACD to monitor a trade I have already entered. I am especially interested in the deviation of the MACD and the 5 period SMA, and when the SMA dives into the MACD histgram or swings out and away from the histogram lines I get a great idea of the strength of the move and the short term trend relative to the velocity of the trend. It is, I suppose, my early warning system for trade exit. I recommend using the MACD for a while and gaining some valuable experience with this indicator before relying heavily on it. It takes a bit of getting accustomed to, and experience is the best teacher with this indicator. But with time and patience you can master this indicator and enjoy great success.

I write mainly about financial topics, specifically daytrading the ES and YM emini contract, and many of my more advanced techniques can be found at my blog, The Fractal Futures Trader.

I also also review a top trading program for beginners at The Index Trade Secret

I encourage all to read the blogs and learn how to trade, as you can add $500-1000 dollars a day to your pocket book. Best of trading to all.

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