From the previous page we left off with a long position after signal
(v) at the start of Decemember.
Figure 3 is reproduced.
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Enter Trading Range - After the buy signal in December (v), the period in January is quite volatile. There is a succession of buy and sell signals (vi, vii, viii, & ix). Another warning of using an indicator that uses exponential moving averages is that they are poor predictors of what will happen during trading ranges (also known as ranging markets or sideways trends). There are ranging markets in January and in Feb/March. A trader using MACD crossovers as an automatic trading system would probably incur losses over this period.
The latter part of Figure 3 is blown up and extended while some trend lines are added to show ranging markets.
If a trader recognizes the trading ranges he will avoid heeding the MACD’s signals and probably save on transaction costs and whipsaws. A day trader or another shorter term investor may adjust the MACD indicator or use an indicator that is better suited to ranging markets (RSI) to try and capture the gains from those intra-monthly swing movements.
- Entering and Exiting a Second Trading Range – A trader is holding the Dollar after buying in late January (ix) and will short the Dollar when a sell signal appears at the end of February (x). He would then buy the Dollar again in mid to late March (xi).
An experienced trader may be holding the Dollar (through the ranging markets) after buying in the beginning of December (v). He may sell in February (x) and buy in March (xi) to lock in some of his gains, or he may wait out this second trading range until the Dollar breaks out and the MACD gives the next sell signal. Of course his analysis would have to be telling him that it is a good idea to hold the Dollar over the Yen for this period.
- Uptrend and the Last Sell - Whether a trader is a novice or experienced, from the signal (xi) to (xii) it is a relief to finally ride a trend again, after all of that ranging activity the past four months. In this case the trend is an appreciation of the Dollar. In April (xii) the uptrend peaks and the MACD lines converge to give the final sell signal in this example. The Dollar has appreciated as high as 108.50 at this point.
