MACD Indicator Vs Price Action

MACD Indicator Vs Price Action

One very popular indicator in the world of Forex trading is the MACD (Moving Average Convergence Divergence). The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
Price action trading involves learning to analyze a “naked” or indicator-free price chart to make one’s Forex trading decisions. Traders who trade with price action as their primary chart analysis tool enjoy the clutter-free approach that “plain-vanilla” price chart reading brings. Price action traders also enjoy the fact that learning to analyze simple price action setups gives them the power to spot potential moves in the market well before any indicator like MACD produces an entry signal. For these reasons and more, many traders believe price action to be the best Forex strategy .
MACD vs. Price Action
Price action easily wins the battle with MACD when it comes to identifying trending markets and finding high-probability entry points. The primary reason this is so, is because once you know how to identify a trend based on price dynamics, you are basing your trading decision off of “core” market data, instead of the secondary-interpretation provided by MACD.
For example, price action traders identify an uptrend by a series of higher highs and higher lows, and a downtrend by a series of lower highs and lower lows. Once you know how to spot these price action based trend identifiers, it is a very simple thing to look at any market on any time frame and identify whether that market is an uptrend, downtrend, or consolidating. In contrast, if you were relying on MACD to identify trends, you would have no context to base your on-going analysis from, other than whether or not the MACD has risen or fallen above or below the “signal line”.
Furthermore, it is simply unnecessary to try and learn how to identify trends or turning points in markets based on indicators, either alone or in conjunction with price. Price action contains its own clues for trend identification, and it even provides traders with easily identifiable trading setups that they can use to enter the market at times of high probability. So, since you can learn how to analyze a market solely on price action, there really is no need to divert your focus and attention by concentrating on secondary indicators. If you want more information about price action you can check out this price action tutorial video.
In the chart below we can see the daily NZDUSD currency pair with a standard MACD indicator applied. A few things to notice here; first, during the time when the NZDUSD was moving sideways in a trading range, the MACD was absolutely useless and would have caused confusion and indecision, whereas knowledge of simple price action strategies and confluent levels would have provided at least 2-3 excellent entry opportunities.
Next, by knowing how to identify down trends through lower highs and lower lows in price, we could have easily saw this market was starting to trend lower. One glaringly obvious problem is that the MACD moved above the signal line on a slight pullback within price, we then got an obvious bearish inside bar setup with the downtrend while MACD was actually predicting bullish momentum. We can then see price fell off a cliff netting savvy price action traders the possibility to make 3 times risk or more. To learn more about why trading with indicators destroys Forex trading success, click here.