# MACD and DMI/ADX: Do you use them in your trading?



## stockGURU (9 March 2010)

For those unfamiliar with the acronyms:



> *MACD:* MACD, which stands for Moving Average Convergence/Divergence, is a technical analysis indicator created by Gerald Appel in the late 1970s. MACD shows the difference between a fast and slow exponential moving average (EMA) of closing prices. Since it is based on moving averages, MACD is inherently a lagging indicator.
> 
> *DMI:* An indicator developed by J. Welles Wilder for identifying when a definable trend is present in an instrument. That is, the DMI tells whether an instrument is trending or not.
> 
> *ADX:* An indicator used in technical analysis as an objective value for the strength of trend. ADX is non-directional so it will quantify a trend's strength regardless of whether it is up or down. ADX is usually plotted in a chart window along with two lines known as the DMI (Directional Movement Indicators). ADX is derived from the relationship of the DMI lines.




For those who use these indicators in their trading, what do you use them for? Do you find them useful, and if so, how?

Do you use them in combination with other indicators? If so, which ones?

Any examples using charts would be very much appreciated.


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## opulence (1 June 2010)

I've had a look at this indicator recently. From what I gather, you need to establish a trend in the line upwards to establish if the trend is strong or not? To me this makes no sense (someone shed the light if I'm missing something blindingly obvious) but if you can pick a trend in the ADX line.... why not pick the trend in the price action?

I've found that (as you would expect) oscillators work pretty well when there is no trend present. However, I'm starting to loose faith in indicators during a trending market. At the moment all I can do is set a stop loss to prevent a sudden trend from killing my trade during non trending (which apparently is 2/3 of the time anyway) and then reverting back to the SARs and MAs there on afterwards. 

Again, this is just my rambling thinking out loud but so far not impressed with the ADX line.


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## waza1960 (1 June 2010)

ADX: I like to use ADX as a filter and I find it very effective i.e you might have a crossover system and then you would filter it using the ADX .
 MACD IMO is overused and over rated but I use the Diff plot sometimes on long systems.


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## tech/a (1 June 2010)

In this market you'll be badly whipsawed.
Generally too slow for me


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## pixel (1 June 2010)

stockGURU said:


> MACD is inherently a lagging indicator.



True, if you use it with Appel's standard long-term periods.
Analysing the way it's calculated, I've found a way of turning it into a much faster-reacting indicator. Of course, it will, strictly speaking, always remain "lagging". Anyone show me a "predicting" indicator?  With far shorter periods, it has become part of my bread'n'butter setup. (Note the word "part".)

I have only implemented this strategy as an extension to the Market Analyser Professional - see the MDS website and look up my Trinity Pages.


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## Superboot (1 June 2010)

I am considering using the slope of the ADX to help identify the 'stronger' candidates in a breakout system.... not sure if this is a legitimate use of ADX and whether it can be coded in AB. It is currently on the 'to do' pile


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## brty (1 June 2010)

stockGURU,



> For those who use these indicators in their trading, what do you use them for? Do you find them useful, and if so, how?




An interesting question as I don't know of anyone who uses anything they don't find useful.

The only 'indicators' I use are price and volume and what they are doing in relation to the past. I do look at things like MacD, but I don't trade from them. I often find the best trades look terrible with just about any indicator until after the initial part of the move has occurred, a lagging event.

I have found that the percentage of winners with low stops is way too low to trade with pretty much all indicators.

brty


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## Wysiwyg (1 June 2010)

How bizarre. A Stock Guru since 2004 asking about indicators. As if anyone would divulge their years of hard earned experience to someone not half interested in trying the indicators themselves. If even on a simulator.


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## BeNice (22 June 2010)

I find that using a modified RSI tends to produce very good results as well, throw that one into the pot. MACD is clearly very useful as well, I have found that tinkering with which MA's you use to define the MACD can have a very large impact on PnL w.r.t certain instruments. Food for thought.


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## $20shoes (22 June 2010)

You may find that on your trading journey you move from Indicators FTW!  to Indicators WTF! ( i might use that as the title of a book )

The problem with indicators is that you're invariably overlaying your own variables on to  an indicator so as to curve fit to a market, that in spite of what your indicator suggests, delivers what it delivers.  
*"Universal Principles of Successful Trading"* 			 			has a good section on the potential traps and wiggle room with indicators.

I find them useful for analysis, but less useful for making money.


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## Timmy (22 June 2010)

I don't use indicators even when I drive.


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## white_goodman (22 June 2010)




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## BNECBD_DayTrader (22 June 2010)

MACD=


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## supermatt (23 June 2010)

white_goodman said:


>





aaahahahahahhaha . man that is a funny reply. thanks hahaaaaaaaa


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## BBand (23 June 2010)

Hi StockGURU,
Too much negativity here - so to balance it a bit.......

Mention indicators and people either love them or hate them
That's life - we all have opinions, and sometimes we are best to keep them to ourselves

"Indicators don't work", how often have we heard that! - usually spouted by some so called "analysis know all" or one of their deciples - really impressive ha ha

Just because they can't use them successfully or have another agenda doesn't mean that others can't. Be your own person - find what works for you

The gurus and know alls have their fair share of failed trades and we can expect the same

Most indicators have been designed to cater for a particular market condition whether it be trending or range bound - so you must use the correct type for the prevailing market condition

My preferred indicator type are oscillators
There are a few that can be used successfully in ANY market condition
There is at least one which offers good horizontal S/R levels (that provides NO LAG)
 They can give prewarning of a possible trend change i.e. price weakening or strengthening
They also give prewarning where price has moved to an extreme and a retrace can be expected

Their trace can be used for trendline trading, Dow Theory hi/lo, pattern trading and conventional overbought/sold (with a little bit of work, this can be improved)

My trading is based on indicators (getting a bit lazy now - just want answers, not trying to impress myself now)
I use oscillators in all my strategies whether it be trend trading, indicator S/R (my favourite), trend reversals,breakout from consolidation, trend continuation or retracements

So if you are a visual person and indicators appeal to you then go for it - you may find they work for you also

You should understand their formula, and it should make sense to you otherwise you will probably not feel comfortable trading them

Don't use indicators for intraday trading - too much noise. Best use PA and price S/R -will require more effort, than just glancing at a chart to see if your indicators are aligned

Bottom line:
Like everything worth while you have to put in the effort to receive the rewards - there is no shortcut
All our analysis does is give us an edge - when "x" occurs "y" usually follows i.e. a reason to enter a trade

PS You mentioned the ADX - have a read  of ADXcellence, Dr Charles Schaap, he offers approx 10 ADX strategies - this may be a good starting point for you

Sorry for the above ramble, but INDICATORS DO WORK
We all have our favourite type of analysis and thats understandable, ultimately they give us our edge - whatever that is

Have a good day
Peter


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## baby_swallow (23 June 2010)

I use MACD in some of my medium term setups but I don't use the crossing signals. I look for the histogram divergence with price to gauge the strength
of a prevailing trend together with volume...then I look at a price pattern to setup before entering a trade.


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## ThingyMajiggy (23 June 2010)

I would rather have my eyes hacked out with a plastic spoon than use any of that rubbish.


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## Wysiwyg (23 June 2010)

$20shoes said:


> You may find that on your trading journey you move from Indicators FTW!  to Indicators WTF! ( i might use that as the title of a book )



I believe you are studying price/volume indicators. If one doesn't open a trade on an "indication" then what possibly could prompt an entry? Fundamental criteria?


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## $20shoes (23 June 2010)

Fair Point WYSIWYG. I do use indications - ABSOLUTELY. Price, vol...even MAs to an extent. 

My point is not to disparage those who use indicators but to iterate that they are simply a crutch. My position is that we tend to overlay some variable on a market that of course doesn't move to any indicator - the indicator moves to the market. So we may get a false sense that we can control the market, and certainly that we can predict market movements. But yes, we absolutely need to develop indications that the market may move in a certain direction, and we try to derive an expectancy based on those indications - whatever they may be. 

One point is that that we at best deal with data that only "symbolises" the market - that is one bar is the flow of orders for that period. So we already have smoothed, second hand data (unless you're scalping the spread) even in its rawest form. One bar is like charting a trade log for that period. So, Adding further indications is then taking that second hand representation  and adding further layers of smoothness. 

If you find something that works, more health to you I say. I just think people get it in their heads that if a system of indicators makes you money, its the indicators that are making you money. But take away the indicators and the market has not been altered it has done the same thing. So, what has overlaying an indicator actually done? Nothing - it has given you comfort and that is it.


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## Wysiwyg (23 June 2010)

$20shoes said:


> If you find something that works, more health to you I say. I just think people get it in their heads that if a system of indicators makes you money, its the indicators that are making you money. But take away the indicators and the market has not been altered it has done the same thing. So, what has overlaying an indicator actually done? Nothing - it has given you comfort and that is it.



 Yes simply a representation of the preceding price and volume. Always one bar too late. utthedoor: 
Tom Basso and Van Tharp have some paragraphs about random entry and how they could make money using a trailing stop and a 1% risk money management system. 

p253, 254 T.Y.W.T.F.F.

"Although the returns were not very big, making money 100% of the time with random entry and the requirement of having to be in the market at all times is pretty impressive."


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## tech/a (24 June 2010)

A larger majority of technical traders use indicators.
A larger majority of technical traders cant turn a consistent profit.

Most "Average Educators" Teach/write/charge for----indicator based trading "Secrets"

Its pretty clear where the money is.


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