First of all, is it your strategy to trade the 12 / 26 EMA cross? Do you even have the 12 EMA or 26 EMA on your chart? Do you have any other indicators with their period set to 12 or 26?
Most people trade when price crosses some horizontal line on the chart. Some advance this method by also drawing sloping lines on the chart, or trend lines that connect highs to highs and lows to lows. Then when price breaks through one of these lines, they open a trade. Since they only have an entry signal method, they have to make up a profit target. They really have no idea where price will actually stop, but some "claim" that the Fibonacci values will tell them. Of course, anyone who has traded more than 3 hours knows that is some serious hocus-pocus.
The next most popular form of trading involves forecasting future price movement by referring to the formation of the previous candlesticks. A candlestick and a price bar are the same thing, just a different design. The bar has "pins" that indicate open and close and the top of the bar represents the high while the bottom of the bar represents the low. The candlestick gives a price bar a body between the open and close and can be colored to indicate if the price rose or fell from the open price of the candle. The problem with analyzing candlesticks is that it is also a made up analogy. Perhaps in 1400 AD it was effective for the 100 traders who used it, but with the volume of today's market, the "look" of the candle rarely means anything. Of course, it is further complicated by the fact that no one knows which time chart is the correct one for analyzing the candle. Sure, these guys are passionate about their studies, but so what? Money talks.
Those are two of the popular methods of trading. Eventually the more intelligent and serious traders realize both methods are critically flawed. Usually this happens after they lose most or all of their money adhering to their rules the best they can. You force yourself to believe it will work because some other guy sold you the advice or strategy they use to make millions. The millions they make though, are from giving their advice. You begin to wonder how you can actually beat the market enough to make a profit and so you turn to indicators. And now, by some divine intervention, you have stumbled onto this blog and are learning some new truths...for free!
I don't know what moving averages you have decided are important to you. When I analyzed market action in the past, I noticed that the 5/13 cross seemed to be the biggest candles of the day. So, let's assume you use those two. Personally I prefer SMA moving averages over EMA moving averages. They both cross each other at the same time, but the SMA's tend to show a little more distance between them than the EMA's do. For me, that means it is easier to see.
Now you could get an EMA crossover arrow with an alert on it. You can find that indicator from a simple google search. Once you load it into mt4, just right click on it and click on modify. Inside the meta editor, click edit / find / ema, and you can change the indicator to sma if you desire. This will give you an audio alert when the crossover occurs as well as a visual arrow on your chart.
Okay, great. Hopefully you also have the two moving averages on your chart. Now, just for fun, let's create a histogram. For this you will need a MACD that shows its OSMA in a histogram and signals with 2 lines that intersect each other. Preferably, it also has a 0 line crossing alert, or an alert when the 2 lines cross. Grab that MACD indicator and make the inputs 5 / 13 / 2000. Now you are using the MACD according to your trading plan. Uh oh, look out now!! You are about to start making some money!! What you are seeing is the histogram of the price action between the 5 EMA and the 13 EMA. Again, you can change the code of the MACD to SMA if you want to.
Okay, dkrock, wonderful picture, but how do I use it? Ahhh, my young padawan, there are 3 ways. Ready?
1. In its current configuration, every time the main line crosses 0, then the 5 EMA and 13 EMA are also crossing each other. This is your trend direction. Ideally, you only trade buy orders when the line is above 0, and sell orders when the line is below 0. If price is trending, this is a great visual tool. Each time price consolidates you can see the consolidation. You can see the directional head fakes. You can also see reversals that might have enough steam behind them to be profitable.
2. Next, open up your indicator list and left click on "moving average" (in the Trend folder) and drag the mouse on top of the MACD indicator. Let go and set the periods to 5 Simple. Where is says "Apply to:", click on the drop down menu and choose "First Indicator's Data". Choose a color and line thickness and click OK. Now you have your "Range" measurement. Price can range even inside a trend. Each time the main line crosses the 5 SMA you have an opportunity to either open a trade, or take profit, depending on the price action.
3. Now do the same thing using period 13. Oh no, now you are a beast!!!! Is it fool proof? No. Can you still lose a trade? Yes. But now you can see the loss and close it with confidence. This is now your high probability indicator.
If you have a MACD indicator that alerts to the 2 line crossover, then you can choose to change the 2000 to either 5 or 13.
Combine the three views and what do you have? Your safe probability trade is when the main line is above/below 0. Your moderate probability trade is when the main line is also above/below the 13 line. Your super high probability trade is when the main line is also above/below the 5 line.
Different time frames will paint different views and different levels of your personal confidence. You can also use multiple time frame MACDs to align the signals to trade when multiple time frames all agree at once. There are several tools for that. Some will put mini charts on your chart, some will draw the MACD from the other time frame, some will draw all the MACDs on top of each other, and there is even one that will allow you to change the color of your candles on your current chart as each of the lines are crossed, and show you the position, by color, of the other time frames. That is the one I use.
If you have got this far, then you should be starting to form a plan in your mind. Use your own inputs and your own time frame. Find another indicator to confirm the direction you want to trade in, and now at least you have a little more confidence when a horizontal line or trend line is broken, and when to take profit based on the market action, and not some made up number.
This is just one tool and while it should be profitable, you have to remember it is a numbers game. When you play poker you do not win every hand, right? So do not expect to win every trade. The use of the MACD in this fashion is like having an ace or pair in your hold cards. You still need more cards in your favor, so you still need price to move as predicted. Overall though, at the end of the day, you should have made much more than you lost. And even if you screw up completely, you have a picture that helps your mind see you are not winning.
I like indicators because they show me possible reversal areas, consolidation, high probability entries, and nice profitable exits. It is in your best interest to trade during volatile market hours. If the market is not moving up and down, you cannot make profit...DUH! Good Luck!!
This is a picture of a 2 line MACD with the inputs I discussed. The candles are MACD Candles set to 5/13/5. I moved their data to the upper right hand corner of the chart. Some exits are most likely not confirmed by your other indicators. I had to assume where the best matched entries and exits are in this photo. The last trade is created with AUD strength varying between 1 and 0, so there is no reason to exit on the flutter of the MACD. Additionally, the higher time frames were all signalling Buy. Finally, the blue 5 SMA was not making any attempts to cross the yellow 13 SMA until the upper area of the trade. This was a LIVE screenshot, so I would have taken profit at the yellow dash line and waited for the presumed consolidation to end before entering the next trade. The fun part for you now, is to see if I was right:)
