The MACD Momentum indicator is a powerful tool for traders using MetaTrader 4. Essentially, the red line represents the 10-day momentum of the MACD histogram, smoothed over 3 days.
This concept was inspired by trading expert Tom Aspray. While I'm not sure if this is exactly what he envisioned, it’s definitely worth considering for your trading strategy.
In the fall of 1986, Tom Aspray wrapped up his work on a groundbreaking indicator known as the MACD Histogram/Momentum. The MACD, which stands for Moving Average Convergence Divergence, is a fantastic indicator. However, it can sometimes lag when applied to weekly data. This tool was originally developed by Gerald Appel, who has contributed significantly to technical analysis.
Tom first introduced the MACD at a CompuTrac conference back in 1984. At that time, not many traders were familiar with it, let alone using it in the commodities market. Fast forward to today, and it has become a staple in technical analysis.
Tom dedicated time to optimize the MACD by experimenting with different combinations of inputs for the three exponential moving averages. By tweaking these moving average parameters, he discovered markedly different results.
For instance, the traditional settings for silver (12 days, 26 days, and a 9-period exponential average of the difference) weren't always profitable. In contrast, the combination of (10, 20, 9) yielded a profit rate of 54%, with an average gain of 67.5 points against an average loss of only 34 points.
After nearly five years of studying and utilizing the MACD, Tom realized that optimizing it wasn't enough. He believed that having a method to anticipate crossovers would provide a significant edge. After testing several alternatives, he found that applying a 10-day momentum (with 3-day smoothing) to the MACD in histogram format (MACD-H) delivered impressive results.
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