Common Mistakes in MACD Revealed

I believe MACD is a commonly used technical indicator for many traders. Do you find yourself rushing to short at a death cross and getting excited to jump in at a golden cross? But why does the market often move against you right after you enter? How many people have experienced a situation where a bottom divergence appeared, and just after entering, the market fell? Seeing a top divergence and thinking it is a ceiling, only to find the market continues to make new highs. When a golden cross appears, you excitedly jump in, only to hit your stop-loss right after. Why do these classic signals often lead us into the abyss of losses? It's not that MACD is wrong; it's that you are using it incorrectly.

Many beginners get excited when they see a golden cross in MACD, thinking that a big profit opportunity has come. But have you ever considered whether such a simple signal can really guarantee that every trade will be profitable? Many traders, when they see these classic signals, often overlook the market context, trends, and structure, resulting in unnecessary losses. You may have read some theories about MACD and know it measures price momentum and reversal points, but in practice, you'll find that many times it doesn't work as you think, especially in a choppy market or an unclear trend environment. Relying solely on these signals can lead you to losses, so why do these classic signals fail?

1: Ignoring the Market Background

For example, if the market is in a consolidation phase, the effectiveness of the MACD golden cross signal within the range is poor. At this time, the main feature of the market is that prices fluctuate within a certain range without a clear trend. Simply relying on the golden cross as an entry signal lacks judgment of the overall market movement.

2: Lack of Structural Confirmation

Relying solely on the MACD golden cross signal is not enough as an entry basis; structural confirmation is equally important. Therefore, it is necessary to consider the breaking of previous support levels, which lacks key structural support.

3: Incomplete Trading Plan

The formulation of a trading plan is crucial for every trade. If you only see a golden cross and enter without setting stop-loss and target price levels, you lack effective risk management. Although the signal indicates a potential rise, the absence of clear stop-loss and profit-loss ratio settings leads to uncontrollable risk. So how can we avoid these problems and increase our chances of trading success?

Step 1: Confirm the Trend:

Before making any trade, first confirm the market trend. When the golden cross appears, is the market in an uptrend? If the market is in a consolidation phase or a downtrend, the golden cross signal is unreliable. Because in a sideways range, the golden cross often serves as a brief reversal signal and cannot be used as a basis for a strong breakout. Even if the golden cross signal appears during a pullback in an uptrend, it is just part of the market's pullback process and cannot immediately be considered an absolute basis for going long.

Step 2: Conduct Structural Verification:

Relying solely on the golden cross signal of MACD is insufficient; structural validation is also necessary. In practical operations, we confirm entry conditions through candlestick patterns, support levels, and resistance levels. For example, seeing effective support and not breaking previous lows, combined with the MACD golden cross signal, can confirm the timing for entry. Structural validation is not just about looking at technical indicators; it also includes a comprehensive grasp of the overall market rhythm and structure.

Step 3: Clarify the Profit and Loss Ratio Planning:

Correct trading is not just about entering the market when you see a signal; it requires comprehensive risk management. You should set clear stop-loss and take-profit points before entering the market, controlling the profit and loss ratio to above 1:1.5 based on market volatility, ensuring each trade is conducted within a controllable risk range. Additionally, you need to devise follow-up strategies. If the price drops, you should look for opportunities to add to your position so that even if the market experiences a reversal, you can respond flexibly and ensure the safety of your capital.

From this, we can summarize three core points to help everyone avoid blindly following erroneous signals in real trading.

One: Confirm the trend background. Whether it's a golden cross or a death cross, it must be judged in conjunction with the overall market trend. Simple signals cannot replace the judgment of the broader market context.

Two: Structure and Pattern Confirmation. Any signal needs structural validation. Based on confirming the market trend, use support and resistance levels to determine the timing of trades.

Three: Strict management of profit and loss ratios. Every trade must have clear stop-loss and take-profit settings to ensure risk control and avoid emotional trading. If you can master these three key steps, then you are not just observing signals for trading, but building a complete trading system that allows each trade to be based on solid reasoning and a stable mindset.

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