How to Trade with the Impulse MACD | Best Alternative to MACD

The MACD, or Moving Average Convergence Divergence indicator, is one of the trading world’s better-known tools with millions of daily users. Still, anyone familiar with it also knows its pitfalls—particularly when the market’s sideways or consolidating. When the market is not trending forcefully, the MACD does wonderfully well in its place, issuing false signals galore. Imagine, though, if you might be able to enhance the MACD for improved performance, and lower these fake signals while making more profits.

In this article, I will present a modified version of the MACD that works much better than the standard one, particularly in consolidating markets, and show you how to use it efficiently with a successful strategy.

Problem with the Standard MACD

The standard MACD has one significant weakness: it performs poorly in consolidating or sideways markets. This is how it generally works:

Bullish Signal:

When the blue line of MACD crosses over the orange signal line, it means buy.

Bearish Signal:

When the blue line of MACD goes below the orange signal line, it indicates a sell.

But these signals become unreliable when the market is not trending. For example, crossover could take place in a process of market consolidation, leading to inaccurate signals that, in turn, can result in poor trades. Therefore, the trader may end up going into a trade that is not consistent with the direction of the market, thus incurring losses.

The Upgraded MACD: What is Different About it?

I discovered an improved version of the MACD, referred to as Impulse MACD, that overcomes these challenges. This improved indicator gets rid of false signals during periods of consolidation and gives entry signals only when the market is trending. In testing, the Impulse MACD did three times better than the standard MACD.

Setting Up the Impulse MACD

To get started, you’ll need to add the Impulse MACD to your chart on TradingView. Here’s how to do it:

1. Go to TradingView and search for Impulse MACD by Lazy Bear in the indicators tab.
2. Add it to your chart.
3. Once added, follow these settings for optimal performance:
   • Set the line color to blue for the MACD line.
   • Change the formatting of the impulse histogram to columns with a red color.
   • Set the color of the signal line to orange.

This configuration will be easier to read the signals and will look closer to the traditional MACD, so it will be easier to compare.

How to Interpret the Impulse MACD

The Impulse MACD functions the same as the traditional one but with major enhancements:

Bullish Signal:

When the blue line crosses over the orange line and the trend is up in the market, a buy signal will be triggered.

Bearish Signal:

When the blue line cuts below the orange line in trending markets, it produces a sell signal.

No Signal in Consolidation:

Under consolidating conditions, the Impulse MACD will not display any signals, minimizing the false trades.

Setting Up Overbought and Oversold Zones

To make the Impulse MACD even more accurate, you can include overbought and oversold levels on the chart. Here’s how:

1. Use the line tool to create two lines on the MACD indicator: an oversold line and an overbought line.
2. Make the oversold line -8.24 and the overbought line 8.24.

This way, you distinguish between weak crossovers and strong ones, and you only take trade with good chances of performing well.

Strategy for Trading with the Improved MACD

1. Basic Strategy

The basic strategy with the Impulse MACD is easy:

• Buy when the blue line crosses over the orange line and the market is in an uptrend.
• Sell when the blue line crosses under the orange line and the market is in a downtrend.
• Do not trade when the market is consolidating (when the lines are moving horizontally).

2. Refining the Strategy with Good Signals

To improve the success probability:

• Search for Crossovers Outside Overbought/Oversold Areas: Make trades only when the crossover occurs outside of these areas. This guarantees you’re capturing more momentum.

Example:

• If the blue line crosses over the orange line when the price is in the oversold area, this is a solid buy signal.
• If the blue line crosses over the orange line in the overbought area, this is a solid sell signal.

3. Dynamic Take-Profit Strategy

Rather than employing a fixed take-profit ratio (e.g., 1.5 times your stop loss), you can use a dynamic take-profit approach:

• Exit the trade when the blue line goes below the orange line (for a long trade) or above the orange line (for a short trade), so you can ride the trend longer and make more profit.

4. Breakout Strategy

The Impulse MACD can also be employed for breakout trades:

• Observe periods when MACD lines are trending sideways over a long stretch (meaning they are consolidating).
• Wait until the lines crossover, which hints at a likely breakout.
• Use a tool like a breakout probability tool (you get with certain premium tools), confirming the breakout will be substantial.
• Once the breakout happens, you can place a trade in the direction of the breakout. Place your stop loss at the prior low (for long) or high (for short), and target a bigger take profit, maybe 3 times your stop loss.

Conclusion

The enhanced Impulse MACD indicator provides a much more consistent and effective trading tool compared to the standard MACD, especially for weeding out false signals in consolidating markets. By using the methods outlined above, such as adding overbought/oversold areas and applying dynamic take-profit strategies, you can increase your trading precision and profitability by a considerable margin. This enhanced version of the MACD is a game-changer for anyone wishing to enhance their trading edge.