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The MACD profit alert offers the advantage of easy pattern recognition that warns of impending changes several days in advance, and the alert can be combined with other stop-loss methods. The disadvantage? Some very nice price moves may not produce any profit alert patterns.

It is best to resist the temptation to use the MACD signal line for entries to the up- or downside once a PTX takes place. Too often, price goes sideways, which can cause the MACD to whipsaw and erode the profits already taken. In the same vein, be cautious about entering a trade at the alert, as continuation moves often can be short-lived.

Many traders will look at these charts and see that the alert pattern usually ends several days from the actual price top or bottom, and they may want to stay in the trade longer. If so, at least take partial profits at the PTX. When using a profit protection strategy, it is better to be early than late. The whole point is to have enough equity to trade again another day. Barbara Star, who is a university professor and part-time trader, provides individual instruction and consultation to those interested in technical analysis. She leads a MetaStock users’ group and is a past vice president of the Market Analysts of Southern California. Price data courtesy of Quotes Plus, Ortonville, MI.

FIGURE 6: DAYTON HUDSON. When the solid and dotted lines merge after a valid bar count, the trade becomes more risky. Often, prices continue in the desired direction, but just as easily, they can go the opposite way. The first downmove of the solid line that formed a PTX occurred on March 30, 1998.

FIGURE 7: JUNE 1998 S&P 500. Here, the solid line dips below the dotted line in March, which generally negates the alert. However, both the solid line and price began rising within a day following the break, even though the histogram remained below its zero line. The risk is that price could fall rather than continue its upward bias.

RELATED READING

Appel, Gerald [1985]. The Moving Average Convergence- Divergence Trading Method, Advanced Version, Scientific Investment Systems.

Ehlers, John [1991]. “The MACD indicator revisited,” Technical Analysis of STOCKS & COMMODITIES, Volume 9: October.

Hartle, Thom [1991]. “Moving average convergence/divergence (MACD),” Technical Analysis of STOCKS & COMMODITIES, Volume 9: March.

Star, Barbara [1994]. “The MACD momentum oscillator,” Technical Analysis of STOCKS & COMMODITIES, Volume 12: February.