I listened to a YouTube video that said the high frequency traders fool the retail traders by “gaming” the MACD. I found this interesting and decided to look into it.
MACD stands for Moving Average Convergence Divergence.
The typical retail trader uses MACD to get “signals” and has little or no idea what the MACD actually is or does.
Here is what makes up the MACD signal:
- The MACD LINE
- this is the difference between two exponential moving averages (emas); the default emas are 12 and 26
- The SIGNAL LINE
- This is a 9 period simple moving average of the MACD line
Here is how it works:
- BUY when the MACD LINE goes above the SIGNAL LINE
- SELL when the MACD LINE goes below the SIGNAL LINE
Some traders prefer a HISTOGRAM that plots the variance between the MACD LINE and the SIGNAL LINE
Here is how it all looks at the bottom of the chart:
The “trap” might possibly be the SELL “signal”:
Followed by apparent “range buying” and then a bullish continuation:
You can see how the buying went from the bottom of the range to the middle of the range to the top of the range; and then the breakout…