My Day Trading system in a nutshell (Part 3) - MACD “Cross-over”

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Hello everyone,

This is Part 3 of the explanation of my system. This is Part 1 of a more detailed explanation - MACD “Cross-over”.

I suggest you use MACD 26, 12, 9: Long Moving Average: 26; Short Moving Average: 12; Signal: 9.

What is its purpose? MACD indicates the current direction of prices.

How does it work? When the MACD and the Signal lines cross-over, that indicates a change of trend.

How to use it?
a) When the MACD line is above the Signal line, that indicates a possible buying position.
b) When the MACD line is beneath the Signal line, that indicates a possible selling position.

NB1: When looking for a setup, first check where both lines stand. Even if all other criteria seem to indicate "Buy", do not proceed unless the aforementioned MACD “Cross-over” a) has already occurred accordingly – and vice-versa for a Sell order.
Again, all criteria must agree.

NB2: The wider the gap (or “separation”) between both lines is, the more the current trend is solid. To the contrary, if both lines seem to be almost confounded, it is preferable to keep away from the trade. The trend might be too weak indeed.

A Frequently Asked Question about MACD “Cross-over”:

As MACD is just made of averages and thus calculated on the base of past results, how could it have any sort of predictive power?

You saw on the previous example that after the “cross-over”, the price clearly followed the direction announced by the indicator. The explanation in but one word: Momentum.

The Price is like a vehicle in motion. The speedier a car is, the longer it will take to change its course. It is the same with prices. Indicators give hints regarding the price “speed” or rather the strength of its current pace. That’s momentum.

The Price has 2 possible directions: up and down. It can also be directionless when it is in a range. When a MACD “cross-over” occurs, it tells us a change of direction has occurred. The “predictive” power only comes through the conjunctions of a few indicators. It is only the combination of those agreeing indicators that will be predictive. Indicators taken separately have less power. In other words, the whole system is greater than the sum of its part.


This is it for today. To be continued ...

In the meantime, good trading!

Mark