Oscillators come in all shapes and sizes, but for my money nothing beats the MACD histogram for sheer simplicity or accuracy. The MACD turn, which is a setup I like to trade on anything from as small as 15-minute bar charts to as large as weekly candlesticks graphs, operates on a deceptively simple premise but actually uses rather fancy money management to turn it into success. The basic premise of the MACD turn is this: Momentum precedes price. That means in a battle between price and momentum always trust momentum.
Here is the setup in a nutshell (see Figure 10.11).
1. Overlay Bollinger band "bands" on a chart using 20 SMA, 2 standard deviation, and 1 standard deviation settings.
2. Overlay the MACD histogram using standard MACD settings of 9-period exponential moving average (EMA) and 12-period EMA.
3. For short setups, price must be in the upper Bollinger band channel; for long setups, price must be in the lower Bollinger band channel.
4. For a short setup look for the MACD histogram to print a lower high bar indicating that momentum is waning.
5. Measure the distance between the low of the most recent bar- and the most recent swing high.
6. Place a sell stop at halfway between the two points for one-third of total position.
7. If the trade is triggered, set a take-profit target at 20-period SMA.
8. If price moves in the opposite direction of the trade and makes new swing highs but MACD histogram does not, sell another one-third of the position at market.
File View Chart Type Time Scale it Period Drawing Indicates
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