Lists of the Best & Worst Market Conditions for Using MACD
MACD has several key elements that are important to know if you intend to use this indicator as a primary entry signal for Buying Long, Selling Short, or Options Trading. Despite the fact that MACD is extremely popular, empirical evidence shows that most Retail Traders using MACD are not consistently successful. Many are baffled by the fact that sometimes MACD works, while other times it fails completely. They endure frequent whipsaw trades that quickly wipe out small gains because MACD gives false signals during certain Market Conditions.
The first thing to understand is that MACD is a Price and Time Momentum Indicator. That means that the price must move before the signal can form on MACD. Therefore MACD cannot lead price as several of the quantity based indicators do. Consequently you would be entering the stock after the initial price move up or down, which can be an asset or liability depending upon the Market Conditions and Trading Conditions at the time.
A Trading Condition is the trading environment at a particular point in time such as Intraday, Daily, or even Weekly. Market Condition is the overall type of price action that is most prevalent among the 6,000+ stocks listed on the Stock Market Exchanges. These are two entirely different conditions but work in harmony as well.
MACD is a Price and Time Momentum Indicator, that employs two Moving Averages to create the crossover signal for an entry.
A list of the best Market Conditions for MACD to work optimally are:
1. Moderately Trending
Moderately Trending Conditions occur about 15-20% of the time, and Velocity Market Conditions occur about 5-10% of the time. Moderately Trending Markets occur somewhat more often but rarely last as long as a Platform Market Condition, which also handicaps a trader. Moderately Trending Market Conditions tend to come after a Platform Market Condition, before a Velocity Top and after a bottom that moves up with Velocity briefly.
One of the reasons so many traders experience whipsaw price action when using MACD is they are attempting to use it in one of the 4 Market Conditions that feature Sideways price action most of the time.
Martha Stokes CMT
TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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