The MACD indicator’s standard settings are 12, 26 and 9.
As with most indicators, you can adjust the settings to change how quickly or slowly it reacts to the movement of price, resulting in the number of trade signals being generated. The numbers 12, 26, and 9 refer to the specific periods used in the MACD indicator, which are known as the “Fast Length,” “Slow Length,” and “Signal Smoothing.”
Now, before we dive deep, We need to see how MACD is constructed.
If you increase the settings of the indicator, it will generate a lot fewer signals, which would prevent many false signals.
The downside of doing this is that you can miss out on the start of some big market moves.
On the flip side, if you decrease the indicator’s settings, it will have the opposite effect, making it more sensitive and generating more signals.
The downside of doing this is that you can have many losing trades because of the false signals the indicator would give.
Now, Lets dig more deeper on each settings level.
By increasing the number of periods for the fast and slow lengths, you’re including more data points in your moving averages.
However, this also means that the indicator will be slower to react to new trends, potentially causing you to enter trades later.
Conversely, if you decrease the number of periods for the fast and slow lengths, the MACD line becomes more sensitive.
However, the downside is that it can produce more false signals, leading to a higher number of losing trades if the market is choppy or if there’s a lot of price noise.
Changing the number of periods for the signal line will affect how quickly it reacts to the MACD line.
That’s why we wrote, “If you increase the settings of the indicator, it will generate a lot fewer signals, which would prevent many false signals.” in the last discussion because every settings when get increased, attributes on generating fewer signals.
If you do decide to change the indicator settings, make sure the changes made are improving your trading results. Traders often backtest different settings against historical data to find the optimal balance for their trading strategy and risk tolerance.
So far You have learned –