The MACD is a very popular indicator used by traders and there is no shortage of videos and articles about it. We will investigate whether the Monthly MACD timeframe is a trading / investment strategy that actually works. I am writing this on the basis that the reader has a basic understanding of the MACD.
We will specifically look at the MACD crossover strategy. There is one time frame that very few people use to trade and that is the monthly time frame. I have analysed a number of monthly charts, adding the MACD indicator across various asset classes and analysed the results.
The monthly chart, even if not trading it, can be used with the MACD to then drill down to lower time frames to find a suitable entry with the direction confirmation.
(1) Alibaba
If we look at Cross 1 it arises while Alibaba is still trading above a key support level. This is more of a 'get ready' sign as opposed to 'go enter'. I am not saying that can't be a strategy, but indicators are relatively useless if used in isolation. Price action should be primary and indicators should be secondary in terms of information used to enter a trade.
If we see above, four months after the crossover there is a powerful candle that breaks through support and then the price rides from $200 all the way down to below $100, a move to the downside of over 50%. This would be the ideal entry.
On Cross 2 there is a signal to go long but if objectively looking at a price chart like this you have to consider that after such a strong and relatively quick move down, is the risk to reward ratio acceptable to enter a long position? It would have been a failed trade. The price action showed no evidence there was a trend reversal.
If an asset reduces in price quickly it is a warning sign to be very cautious about a long entry.
(2) American Airlines
The price action had moved up relentlessly to the first leg of the double top from the confirmed blast off point of $15 per share to $55 per share. This was a 300% move in 20 candles. At Cross 1 we do have a signal that we should go short. If we blindly entered a short here, this would have been profitable, provided the trade was closed before it started a continuation to the upside.
It's Cross 2 that is the most interesting and the higher probability trade. The price action on continuation tries to break the previous high of $55 and fails. A large bearish elephant candle then follows.
Based on the original rocket move up to $55 and a failed attempt to break it again on multiple monthly attempts the price action and the indicator are aligned at the same time. A trader who entered such a move would have been enjoying the fruits from a high probability trade.
By time Cross 3 comes into play the price action had already moved back into the $10 - $15 price range and predictably, after such a powerful move down there would be traders and investors looking to buy themselves a 'bargain'. As in the previous Alibaba example, care needs to be taken before risking your capital on a so called bargain. The market has no demand for the asset. Why would you as one single market participant want to take this risk that everyone else is wrong?
(3) Bitcoin
Bitcoin is a very volatile asset to trade and the good thing about the monthly chart is that it does smooth this out visually.
Cross 1 would have been an epic trade, if taken immediately. There would be an argument that taking this trade then would be risky as it was still within a consolidation range. Just a few monthly candles later, for those that have patience a confirmed break of previous resistance would have been an ideal trade entry point.
Cross 2 is the signal that the powerful bull market in Bitcoin was possibly over. At the point where the crossover signal happens the price was a double top looking pattern. In such a volatile asset and after an exciting bull market, this would have been a signal for some traders to enter a short. The more conservative trader would wait for the break of support. Even as a late entry the price still dropped 50% from the break of support candle.
For Cross 3 the sentiment again reverses and at the point the crossover signal occurs there is already price action suggesting a breakout is possible. For those that had used this strategy they would be considerably be in profit if holding positions for a significant duration.
(4) Gold
Cross 1 would have been a profitable trade if taken but based on price action the cross happened within a range. Therefore the crossover signal, based on the price action should make the trader have an air of caution before taking a short position.
It is Cross 2 where the trader should be alert. Arguably not an entry position just because of the signal, because at the time of the signal, the price action was still within a long term trading range. By waiting 3 or 4 months, a bullish candle is printed that tears through the price ceiling that had previously been resistance.
Cross 3 would have been an unsuccessful trade if taken at the time of the crossover signal. The price action had not done anything at this point to suggest a long term short was in play. This looked like a 'healthy' pull back after a large and long move up.
By time Cross 4 comes into place, on a price structure perspective the crossover was suggesting that the pull back in price was over and sellers had now stopped overpowering the buyers. An optimal time for a continuation trade entry.
(5) Proctor and Gamble
In order to demonstrate that indicators are never alone sufficient to take trades I have show the monthly price action of Proctor and Gamble. The chart shows a huge number of MACD crossover signals, even on the monthly chart!
A number of the crossovers would have been successful but the gains would likely have been minimal. The price action in many cases invalidates the crossover signals that get printed on the indicator. There was only one hugely accurate get ready signal, which was the signal number 4, whereby continuous upside prevails subsequently. This was confirmed when resistance had been broken in a long consolidation range.
If a trader can look at the chart objectively, the first 3 signals were all within a tight range and therefore should not have been taken.
(6) Teladoc
This share went from $25 to over $250 in less than 3 years. The most noticeable crossover was Cross 1 which was a bearish cross on the MACD. At the time this crossover on the MACD was printed it had already broken a support level and closed below it. This was a strong price signal and indicator signal simultaneously. Price ultimately went from $200 to $10, a hugely successful short trade for those that took it.
Cross 2 suggests, based on the signal, that the stock was turning bullish. When assets fall dramatically it is usually unlikely that a new bull market is beginning on the first MACD crossover to the upside. This is where the time and space concept comes in. The asset has not had enough time to recover from the decimation in price. Further, look at the fundamentals, particularly if it is an equity stock.
(7) Tesla
Most people would have likely missed Cross 1 before the Tesla brand and investor sentiment was so widely publicised. If someone had been monitoring this and seen Cross 1 the safest entry would not have been on the signal it would have been a few months later where we see a bullish engulfing candle.
There is so many advantages to just waiting in trading and investing. The rise in share price from over $40 to the top of $400 was meteoric. As this was rising, people were euphoric enough to be able to move price by 1000%. Throughout history all volatile assets have huge pull backs, just wait.
Before Cross 2 gets printed on the MACD there had been 4 red months with wild volatility. Then, a large green candle arises that traps a lot of traders into long trades. However, the very next month and again like other examples, the entire green candle is engulfed by a bearish elephant bar and a MACD bearish crossover signal is noted. We have price action, our primary basis for trade entries, and our chosen indicator working together at the same time to provide confirmation.
In less than 12 months, the price drops by over 50%. Smart money take profits and that is when a lot of people get scared and join the selling, causing quick and sharp movements to the downside.
Building a strategy and summarising
Like all indicator strategies the indicator cannot be used without price action taking prominence. The monthly chart is certainly stronger at accurately establishing the direction of trade. Some key points are:
The safer entries are normally a few candles after the crossover signal is given unless the price action, based on change of structure, is happening simultaneously.
Short entries after significant moves up on volatile equities or assets appear to be very accurate trades on the MACD crossover strategy
For long entries, rarely, at the time of MACD crossover signal is it a good risk to reward strategy to enter. It's likely that there will still be some waiting until price breaks out of a range. Wait for it.
If using the monthly chart and keeping technically correct stop losses it is likely that position sizes will be much lower in size than normal position sizes using standard risk percentages but win rates in theory should be higher
The monthly chart, along with MACD can be used as a basis to then go to weekly or daily charts to get a better value entry.
Trade Clearly!
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