The simplest application of the MAC is to use it as a trend and trend change indicator. The rules are as follows:
Two consecutive price bars above the MAH constitute a new uptrend and a change from an existing downtrend.
Two consecutive price bars below the MAL constitute a new downtrend and a change from an existing uptrend. You can buy or sell or reverse positions accordingly, however, I strongly suggest using another trend change indicator to confirm trend change signals based on the MAC in order to increase accuracy. The AD/MA indicator (to be discussed later in this lesson) can be used for this purpose. You have achieved your initial profit target—the MAL. The stop-loss on this trade is twice the width of the channel as measured on the day that the trade is entered or a reversing MAC signal.
Using the Moving Average Channel
It can be used in at least five different ways. I urge you to study my suggested applications and then decide on which of them fits your needs best.
The moving average channel (MAC) can be used for swing trading consistent with the trend. The rules are as.
If the MAC trend is up, then buy at the moving average of the low (MAL) and take profit at the moving average of the high (MAH) or implement a trailing stop once you have achieved your initial profit target—the MAH
If the MAC trend is down, then sell at the MAH and take profit at the MAL or implement a trailing stop once the profit target has been hit.
Mac application using the five consecutive bar pattern
The last lesson indicated that the more consecutive bars either above or below the MAC as part of a new signal, the greater the odds of a large move. This method uses five consecutive bars as a trigger for a specific method.
When a new MAC buy signal occurs with five consecutive bars above the MAH, buy on the open of trading the sixth bar. The profit target is the range of the five bars. Take profit at the profit target or take partial profit and trail a stop.
When a new MAC sell signal occurs with five consecutive bars below the MAL, then sell on the open of trading the sixth bar. The profit target is the range of the five bars. Take profit at the profit target or take partial profit and trail a stop. Initial stop-loss is the range of the five bars or a reversing signal.
The last application of the MAC is to use the basic MAC buy and sell signals with the Williams accumulation distribution/moving average indicator (AD/MA). Here are the rules of application followed by several examples.