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free download links about online stock trading, forex, futures, stock investing, market, trading systems Moving averages identify trends by filtering out daily price ripples. A more advanced indicator was constructed by Gerald Appel, an analyst and money manager in New York . Moving Average Convergence-Divergence, or MACD for short, consists not of one, but three exponential moving averages. It appears on the charts as two lines whose crossovers give trading signals. How to Create MACD The original MACD indicator consists of two lines: a solid line (called the MACD line) and a dashed line (called the Signal line). The MACD line is made up of two exponential moving averages (EMAs). It responds to changes in prices relatively quickly. The Signal line is made up of the MACD line smoothed with another EMA. It responds to changes in prices more slowly. Buy and sell signals are given when the fast MACD line crosses above or below the slow Signal line. The MACD indicator is included in most programs for technical analysis. Few traders calculate it by hand —a computer does the job faster and more accurately. To create MACD: • Calculate a 12-day EMA of closing prices. • Calculate a 26-day EMA of closing prices. • Subtract the 26-day EMA from the 12-day EMA, and plot their differ • Calculate a 9-day EMA of the fast line, and plot the result as a dashed Market Psychology Each price reflects the consensus of value among the mass of market participants at the moment of the trade. A moving average represents an average consensus of value in a selected period — a composite photo of mass consensus. A long moving average tracks long-term consensus, and a short moving average tracks short-term consensus. Crossovers of the MACD and Signal lines identify shifts in the balance of power of bulls and bears. The fast MACD line reflects mass consensus over a shorter period. The slow Signal line reflects mass consensus over a longer period. When the fast MACD line rises above the slow Signal line, it shows To obtain MACD lines and an MACD-Histogram take these steps: • Calculate the 12-day and 26-day exponential moving averages of • Subtract the 26-day EMA from the 12-day EMA to obtain the fast • Calculate a 9-day EMA of the. fast MACD line to obtain the slow • Subtract the Signal line from the MACD line to obtain an MACD- that bulls dominate the market, and it is better to trade from the long side. When the fast line falls below the slow line, it shows that bears dominate the market and it pays to trade from the short side. Trading Rules Crossovers between the MACD and Signal lines identify changing market tides. Trading in the direction of a crossover means going with the flow of the market. This system generates fewer trades and whipsaws than a mechanical system based on a single moving average. 1. When the fast MACD line crosses above the slow Signal line, it gives a buy signal. Go long, and place a protective stop below the latest minor low.
Figure 26-2. MACD Lines When the fast MACD line crosses above the slow Signal line, it gives a buy signal. Sell signals are given when the fast line crosses below the slow line. These rules help catch all the major trends and generate fewer whipsaws than crossovers of prices and a single moving average. 2. When the fast line crosses below the slow line, it gives a sell signal. Go short, and place a protective stop above the latest minor high (Figure 26-2). More on MACD Many traders try to optimize MACD by using other moving averages than the standard 12-, 26-, and 9-bar EMAs; 5-34-7 is another popular choice. Some traders try to link MACD to market cycles. The trouble is cycles are not present in the markets most of the time (see Section 36). If you use cycles, the first EMA should be one quarter the length of the dominant cycle and the second EMA half the cycle length. The third EMA is a smoothing device whose length does not have to be tied to a cycle. Beware of optimiz- ing MACD too often. If you fiddle with MACD long enough, you can make it give you any signal you want using the same data. A "quick-and-dirty" way to plot MACD is used by traders whose software does not include this indicator. Some packages allow you to draw only two EMAs. In that case, you can use crossovers between two EMAs, such as 11-day and 26-day EMAs as a proxy for MACD and Signal lines. MACD-Histogram MACD-Histogram offers a deeper insight into the balance of power between bulls and bears than the original MACD. It shows not only whether bulls or bears are in control but also whether they are growing stronger or weaker. It is one of the best tools available to a market technician. MACD-Histogram = MACD line - Signal line MACD-Histogram measures the difference between the MACD line and the Signal line (see worksheet, Figure 26-1). It plots that difference as a histogram — a series of vertical bars. That distance may appear puny, but a computer rescales it to fill the screen. If the fast line is above the slow line, MACD-Histogram is positive and plotted above the zero line. If the fast line is below the slow line, MACD-Histogram is negative and plotted below the zero line. When the two lines touch, MACD-Histogram equals zero. When the spread between the MACD and Signal lines increases, MACD- Histogram becomes taller or deeper, depending on its direction. When the two lines draw closer, MACD-Histogram becomes shorter. The slope of MACD-Histogram is defined by the relationship between any two neighboring bars. If the last bar is higher (like the height of letters m-M), the slope of MACD-Histogram is up. If the last bar is lower (like the depth of letters P-p), then the slope of MACD-Histogram is down. Market Psychology MACD-Histogram shows the difference between long-term and short-term consensus of value. The fast MACD line reflects market consensus over a shorter period. The slow Signal line reflects market consensus over a longer period. MACD-Histogram tracks the difference between these two lines. The slope of MACD-Histogram identifies the dominant market group. A rising MACD-Histogram shows that bulls are becoming stronger. A falling MACD-Histogram shows that bears are becoming stronger. When the fast MACD line rallies faster than the slow Signal line, MACD- Histogram rises. It shows that bulls are becoming stronger than they have been — it is a good time to trade from the long side. When the fast MACD line drops faster than the slow line, MACD-Histogram falls. It shows that bears are becoming stronger—it is a good time to trade from the short side. When the slope of MACD-Histogram moves in the same direction as prices, the trend is safe. When the slope of MACD-Histogram moves in a direction opposite to that of prices, the health of the trend is questioned. It is best to trade in the direction of the slope of MACD-Histogram because it shows whether bulls or bears dominate the market. The slope of MACD-Histogram is more important than its position above or below the centerline. The best sell signals are given when MACD- Histogram is above its centerline but its slope turns down, showing that bulls have become exhausted. The best buy signals occur when MACD-Histogram is below its centerline but its slope turns up, showing that bears have become exhausted. Trading Rules MACD-Histogram gives two types of trading signals. One is common and occurs at every price bar. The other is rare and occurs only a few times a year in any market—but it is extremely strong. The common signal is given by the slope of MACD-Histogram (Figure 26-3). When the current bar is higher than the preceding bar, the slope is up. It shows that bulls are in control and it is time to buy. When the current bar is lower than the preceding bar, the slope is down. It shows that bears are in control and it is time to be short. When prices go one way but MACD- Histogram moves the other way, it shows that the dominant crowd is losing its enthusiasm and the trend is weaker than it appears. • Buy when MACD-Histogram stops falling and ticks up. Place a pro • Sell short when MACD-Histogram stops rising and ticks down. Place MACD-Histogram ticks up and down on the daily charts so often that is not practical to buy and sell every time it turns. The changes of slope of MACD-Histograms are much more meaningful on the weekly charts, which is why it is included in the Triple Screen trading system (see Section 43). When to Expect a New Peak or Valley MACD-Histogram works like headlights on a car—it gives traders a glimpse of the road ahead. New highs and lows in this indicator are usually followed by new high or low prices. A record peak for the past three months in daily MACD-Histogram shows that bulls are very strong and prices are likely to rise even higher. A record new low for MACD-Histogram for the past three months shows that lower prices are likely ahead. When MACD-Histogram reaches a new high during a rally, the uptrend is healthy and you can expect the next rally to retest or exceed its previous peak. If MACD-Histogram falls to a new low during a downtrend, it shows that bears are strong and prices are likely to retest or exceed their latest low. The Strongest Signal in Technical Analysis Divergences between MACD-Histogram and prices occur only a few times a year in any given market, but they give some of the most powerful messages in technical analysis. These divergences identify major turning points and give "extra-strength" buy or sell signals. They do not occur at every important top and bottom, but when you see one, you know that a major reversal is probably at hand. When prices rally to a new high, but MACD-Histogram traces a lower top, it creates a bearish divergence (Figure 26-3). A lower top in MACD- Histogram shows that bulls are internally weak even though prices are higher. When bulls are running out of steam, bears are ready to grab control. Bearish divergences between MACD-Histogram and prices identify weakness at market tops. They give sell signals when most traders feel excited about a breakout to a new high! 3. Sell short when MACD-Histogram ticks down from its second, lower top, while prices are at a new high. Place a protective stop above the latest high. As long as prices keep falling to new lows and MACD-Histogram keeps going lower, it confirms the downtrend. If prices fall to a new low but MACD-Histogram traces a more shallow low, it creates a bullish divergence. It shows that prices are falling out of inertia, bears are weaker than they seem, and bulls are ready to gain control. Bullish divergences between MACD-Histogram and prices identify strength at market bottoms. They give buy signals when most traders feel fearful about a breakdown to a new low! 4. Buy when MACD-Histogram ticks up from its second, more shallow bottom while prices are at a new low. Place a protective stop below the latest low. If a bullish divergence between MACD-Histogram and price is aborted and prices fall to a new low, you will be stopped out. Continue to watch MACD-Histogram. If it traces a more shallow third bottom while prices decline to a new low, you are dealing with a "triple bullish divergence" — an especially strong buy signal. Buy again as soon as MACD-Histogram ticks up from its shallow third bottom. The reverse applies to shorting triple bearish divergences. More on MACD-Histogram MACD-Histogram works in any timeframe: weekly, daily, and intraday. The signals of weekly MACD-Histogram lead to greater price moves than the daily or intraday indicators. This principle applies to all indicators — signals in longer timeframes lead to greater price moves. When you use MACD and MACD-Histogram on the weekly charts, you do not have to wait until Friday to get your signals. A major trend can change in the middle of the week — the market does not watch the calendar. Because of this, weekly studies have to be performed each day. |
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