MACD (Moving Average Convergence and Divergence) is a widely used technical analysis indicator. Like any technical analysis indicator, the time that elapses before a signal is generated also becomes an issue with MACD. Here we will talk about some refined strategies to use MACD to make our trading decisions.

The meaning of the acronym MACD, or Moving Average Convergence and Divergence, indicates an intrinsic problem in Forex trading: it is a moving average, and therefore the data it offers will, by definition, always be historical. Therefore, any radical change shortly before you use these cross trading signals as the basis for your Forex buy or sell decisions could have a significant negative impact on your bottom line, particularly when trends are weak or the market is swinging. What can be done to avoid this?

When the trend is slowing down or is already quite slow, the main problems you will face when using MACD are related to your entry position and your take profit position, therefore:

1. Entry signal: Because the data is historical with a time lag before the release, the price may have already reached the reversal point before the entry signal is generated. That may be because during the time lag with a weak trend, the trend weakens further and the market is about to reverse. Therefore, you enter at an inflated price.

2. Exit – When the MACD indicates the crossover with the signal line when you should exit and sell, the price may have already reversed to the point that any profit you make is significantly less than it could have been if you had been aware of the rollback in real time, rather than delayed time. If issue 1 matches issue 2, then you could possibly lose on the deal and will certainly make a significantly lower profit than expected from the analysis.

So how can you overcome these problems and improve the accuracy of using MACD to indicate when to enter or take profit? Forex trading analysts Albin, Gunter and Kain proposed to ignore short-term MACD signals by waiting three days after a crossover has been indicated and then acting if no further crossover has occurred during those three days. They called this refinement MACD R1.

If another cross occurred, they suggested that I wait another three days (or periods) before taking a position. They also suggested that to avoid losing profit by exiting too late after the reversal has occurred, you should determine your take profit levels in advance. So instead of risking a small or even no profit due to the MACD indicator lagging, you should close the trade with a predetermined profit, say 3% or 5% on the entry. Also close the position if a crossover occurs before the predetermined target %.

Although this may seem sensible, it does have weaknesses: There will still be a certain number of false signals as you can never overcome the lag built into the historical data, and also, if it closes at 3% or even 5% and the trend turns strong. and the profit increases up to 10%, then you will lose when there is no need to.

So what? Does it still make sense to go for R1 or is there any other possibility to improve the accuracy of MACD R1? In fact, there is, and Albin, Gunter, and Kain suggest a new revision, called MACD R2. This was intended to outperform the remaining false signals at the lowest possible level.

MACD-R2 Review

A serious problem with R1 in Forex trading was that between the initial signal and after three periods (or days), it took a position to buy or sell. However, it is possible that the market will suddenly reverse at that time and another crossover will occur, causing you to lose money on your Forex trades. Why should this happen?

Simple: After waiting 3 periods after the original crossover, and a second reversal crossover did not occur, you took a position, but the MACD and signal line may have gotten too close without crossing over. A reversal was indicated, but he could not see it, and because the data was historical, the lag meant that he had taken a position very close to or even behind the second crossover and made a wrong decision in assuming that the trend of the original crossover would continue. .

This is how MACD R2 handles this possibility:

R2 adds a predetermined condition before you take a position: there must be a predetermined difference between the signal line and the MACD after the three periods. This should ensure that there is no impending crossover that could ruin your trade.

MACD R2 Example

So, to put all of this in chronological order, let’s take a hypothetical Forex situation where you set a figure of 1.5% as the minimum difference between the signal line and the MACD after three periods and that in this case one period is a day.

A: Day 1 – MACD and signal line crossover.

B: Day 4: You have waited 3 days and no more crosses have occurred.

C: Check the price – assume it is 120.00

D: Check MACD – assume it is 6 (ie 12-day EMA-26-day EMA = 6)

E: Check the signal line, ie 4

F: Calculate the difference and compare it to your minimum difference figure: 1.5%

The formula is 100*(MACD -Signal line after 3 periods)/price = (6-4)*100/120 = 1.67%

This is higher than your default 1.5% so you can go ahead with a position. If the sum had been less than 1.5%, it would have ignored the signal.

Note on MACD: The MACD is derived from the difference between two moving averages: those with a shorter period and those with a longer period. Hence the 12 and 26 day moving averages used above.

If the term MACD (26,12,9) is used, then:

The MACD for a specific point = EMA for 12 periods – EMA for 26 periods. Periods may typically be days. The 9 refers to taking the EMA of the MACD of the previous 9 periods.

The MACD signal line = the EMA of the MACD line.