Traders are familiar with the MACD (Moving Average Convergence Divergence) indicator, but few traders really know how to utilize it properly. In this video, Garrett Dryan, a senior trader, presents what she has learned about a custom, profitable MACD strategy after extensive research.
This strategy was originally designed by a wizard of the market, who people refer to her as the “MACD Trading Genius.” Today, Garrett walks viewers through her exact custom settings and strategy.
The MACD Setup
The MACD is a momentum oscillator that measures the difference between two moving averages. The standard settings (12, 26, 9) may not appeal to every trader. Linda Raschke, a market wizard, modified the MACD to come up with what she calls the “310 Oscillator” for her trading strategy.
Linda’s settings are:
- Fast Moving Average Length: 3
- Slow Moving Average Length: 10
- Signal Line Length: 16
Linda’s strategy de-histogramms the histogram common to MACD charts. Only the MACD and Signal Lines are used—these are derived from simple moving averages. This brings about a slightly different indicator that is mostly trend reversal-biased.
The Anti-Signal Setup
Linda’s “anti-signal” happens when the MACD line crosses against the signal line after a momentum shift. This pattern is used to identify trend reversals, often used after a new momentum high or low. The key is the first pullback in a new trend, which is a potential entry point for a continuation trade.
Examples of The Anti-Signal Pattern
To take it a step further and help the trader understand Linda’s method better, Garrett shares examples from various assets like TLT (Treasury bonds) and the QQQ (tech stocks ETF). The trading lines may reverse against the trend in the MACD. Depending on the market conditions, this implies the possibility of a short or long trade.
TLT Monthly Chart:
A momentum low followed by a change in reversal indicates a trade short.
QQQ Weekly Chart:
The same kind of setup occurs, and there is a potential long trade after a pullback.
Tesla Example:
A failed anti-signal setup, but the price action later shows a strong move upward.
These kinds of setups are not always successful, but they can be used as entry points in specific market conditions. The MACD should be used as a screening tool, and then confirmation should be made with price action.
The Hybrid Approach
This suggests that, at times, MACD may complement a greater strategy if the entire process of the indicator is followed along with the analysis of price action. The “anti-signal” setup on the MACD can act as a trigger to initiate further investigation, thereby enhancing adaptability and adjusting the position for any changing markets.
Trend Reversal and MACD
The primary advantage of using the MACD with Linda’s custom settings is that it tends to emphasize early trend reversals. For a trader, the first pullback in a new trend is critical for identifying high-probability entry points. Using the right analysis, traders can capture significant moves without needing to perfectly time the top or bottom of the market.
The Importance of Continuous Learning
As Garrett also points out, it is very important to constantly test and hone strategies. In researching successful traders and their methodologies, such as Linda Raschke’s use of the MACD, one can expand one’s toolkit and gain an edge in the market. This is the essence of trading – the constant pursuit of improvement and adaptation to ever-changing market conditions.
Final Thoughts
The MACD Trading Strategy of Market Wizard Linda Raschke offers a unique and profitable approach that any trader can incorporate into their strategy. With the right parameters customized to the MACD, it can be used to identify trend reversals, thereby improving trading results. Whether it is an alert system, a part of a larger model, or simply a tool to refine your price action setups, the MACD strategy holds tremendous power for those willing to study and adapt.