Discussing the article: "Reimagining Classic Strategies (Part X): Can AI Power The MACD?"
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Check out the new article: Reimagining Classic Strategies (Part X): Can AI Power The MACD?.
Join us as we empirically analyzed the MACD indicator, to test if applying AI to a strategy, including the indicator, would yield any improvements in our accuracy on forecasting the EURUSD. We simultaneously assessed if the indicator itself is easier to predict than price, as well as if the indicator's value is predictive of future price levels. We will furnish you with the information you need to decide whether you should consider investing your time into integrating the MACD in your AI trading strategies.
Technical analysts employ the indicator to identify entry and exit points in various ways. Fig 2 below is a screenshot of the MACD indicator applied to the GBPUSD pair using its default settings. The indicator is included into your installation of MetaTrader 5 by default. The red line, called the MACD main, is calculated by the difference between two moving averages, one fast and the other slow. Whenever the main line crosses beneath 0, the market is most likely in a downtrend, and the opposite is true when the line crosses above 0.
Like wise, the main line itself can also be used to identify market strength. Only appreciating price levels, will cause the value of the main line to increase, and conversely depreciating price levels will cause the main line to fall. Therefore, the turning points, where the main line forms a shape resembling a cup, are created by a shift in the market's momentum. Various trading strategies have been implemented around the MACD. More elaborate and sophisticated strategies seek to identify MACD divergence.
MACD divergence occurs when price levels rally in a strong trend, breaking to new extreme levels. Whilst on the other hand, the MACD indicator is in a trend that only grows shallower and begins falling in sharp contrast to strong price action seen on the chart. Typically, MACD divergence is interpreted as an early warning of trend reversal, allowing traders to roll back their open positions before the markets become more volatile.
Author: Gamuchirai Zororo Ndawana