In today forex faq, we have a question regarding the MACD indicator from one of our fellow subscribers.
Below is the question:
MACD being a lagging indicator then how best can it be used with any leading indicator to get a proper entry and also mention the leading indicator used with example.
First of all, let me spend sometime here to explain to you what is a leading and what is a lagging indicator. A leading indicator is one that is able to give you an advance warning of the market movement.
As for a lagging indicator, it is generated based on historical data and is not able to give you any advance warning of the market movement.
However the MACD indicator is pretty unique, it can be lagging as well as leading depending on how you use it. If you simply use it for entry based on the crossover of the MACD lines, it is just a lagging indicator.
If you were to make use of the MACD divergence feature of this indicator, it will be a leading indicator. The MACD divergence is a pre-warning of a change in trend. For example, when you see a MACD positive divergence, it is a sign that the price is going to move up soon.
If you see a MACD negative divergence, it is a sign that the price is going to move down soon.
Since your question asks me to give you an example of a leading indicator, it will be the Fibonacci indicator. The Fibonacci extension is a leading indicator. It is able to tell you roughly where the price is going to extend to based on the retracement level so that you can place your target profit to exit your trade.
When the price retraces to hit the 0.500 or 0.618 Fibonacci retracement level, you will find that the price will usually extend to the 1.618 extension level.
when the price retraces to hit the 0.382 Fibonacci retracement level, you will find that the price will usually extend to the 1.272 extension level.
So what you can do is to combine the MACD indicator with the Fibonacci indicator to trade. When you see the price touching a support level at 0.500 retracement level. Once you see your MACD histogram flipping to the top side, you can enter a trade and then set your target profit at the 1.618 extension level.
I hope that I have answered your question and do feel free to give your comment or ask question below.
If you are interested to learn how to trade with a modified MACD indicator as well as how to trade with multiple Fibonacci which has made me 429 pips last month (equivalent to $4,290 based on trading 1 standard trade per trade), you can take a look at the course below.