MACD Entry

JJJJ

I am keying in on entering a trade based on the MACD histogram along with some other indicators. If I am looking at a daily chart, and I see the MACD histogram hitting a low and starting to turn up , should I enter then or wait until the histogram crosses the zero line ? Which approach would tend to give better results ?

markd

You would have to do a study to really know. MACD crossing over the zero line is the same as the MAs crossing, which is the conventional signal. But, as you point out, the histogram changing direction can get you in earlier. The problem is the whip saws. A shorter histogram bar really indicates the trend is losing momentum, but the trend can do that several times before actually reversing in a tradable way. Too many whipsaws will eat the profits from the good hits.

I'm guessing the safest way to implement your method (but I haven't studied it, just looked at a few stocks) is, if you are going long, take the shorter bar below the zero line only if both indicator MAs (MACD Line and Signal) are above the zero line. So essentially you are buying weakness in an up trend, which is usually OK. Vice versa for shorts - take the shorter bar above the zero line only if both MAs are below the zero line, which is buyer strength in a down trend, which, if the down trend is still strong, shouldn't last.

Also, I think you would want to get to know how a particular stock trades - is it consistent, or does it spike or die too often to be reliable. You might want to try it on ETFs, which are based on indexes. Assuming one stock doesn't dominate the index, ETFs tend to smooth out the volatility of the individual component stocks.