Indicator hack #2: the Double MACD pimp out

“Which are the best indicator settings for MACD?”

I normally recommend people stick with the default indicator settings – they are tried and tested, and there’s no such thing as ‘perfect’ settings – they all have weaknesses. It’s about understanding the indicator and learning its strengths and weaknesses, rather than trying to ‘fix’ it.

But here I want to show you a little trick. It involves doubling up on the MACD indicator, and applying very different settings to each. The first gives us a far-sighted early warning system of where a trend is about to change … the second gives us a lightning-fast trigger when that change happens.

The MACD powerhouse indicator

The MACD is a really powerful tool for traders. It’s a little powerhouse of moving-average data – all filtered down into a simple-to-read indicator.

It takes the form of two lines and a histogram, looking something like this …

The faster line is the moving average of the distance between two moving averages … the slower line is a smoothed out moving average of the first line … and the histogram plots the two lines moving closer and further apart.

(On some trading platforms – like the one above – the histogram changes colour depending on whether it’s above or below zero. On others – like the ones below – it’s green when getting bigger, and red when getting smaller. But don’t worry about the histograms, as I won’t be using them here.)

So, what do all these lines and bars have to tell us?

The MACD can tell us about momentum building in a market price, and give us clues about when trends are running out of steam. The place the MACD falls down is that it’s a lagging indicator, which means that it relies on what’s happened to predict what’s going to happen.

This means that if you have the settings turned up too fast, you’ll get lots of false signals. And if you have the settings on too slow, you’ll get into trades too late.

The solution most traders go for is to find some middle ground – not too fast, not too slow.

But here I want to show you a different solution … where we use a double MACD – one to cover each ‘job’.

The standard MACD default settings that you’ll find on most trading platforms are: 12, 26, 9.

Instead, we’re going to hack those settings twice, putting two different MACDs on our charts:

A fast MACD setting (this’ll be our trigger): 5, 13, 2

And a slower MACD setting (this’ll be our filter): 24, 52, 9

This is how I set them up on my broker’s platform …

 

I’m also going to add a 55-period Exponential moving average to my chart, which will act as a guide for stop levels.

Applied to a 4-hour forex chart, you can see how different these two MACD readings are …

The fast MACD jumps about during the trend, while the slow MACD filters noise out of the price action.

Applying the Double MACD

Here’s an example of the kinds of signal we can get from this pairing.

I will only take a buy trade if the slower MACD level is above zero, and will only take a sell trade if it’s below zero.

The price also needs to be below the moving average for a sell, and above the moving average for a buy.

The trigger to open a trade is a crossover on the faster MACD.

The trigger to exit a trade is a crossover on the slower MACD.

Here’s an example …

With trading strategies, there’s always a temptation to load more and more indicators onto our charts, and I believe it’s an error to overburden our charts. Just because I think the MACD is a great indicator, doesn’t mean that two MACDs will be better than one. (It’s that kind of logic that landed me with 3 children and 2 dogs!)

I’m planning to do some more testing on this double MACD trading. If you have any thoughts – please share them at the foot of this page.

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