Experiments in Technical Analysis
- Thread starter karthikmarar
- Start date
Re: Experiments in Technical Analysis - Trading the MACD
Hi friends
The first round of the System Implementation Exercise (SIE) is concluding today. It has taught all the participants a lesson or other. For me it has shown how such an exercise with a new system tells so much about the drawbacks of the system. Any amount of Backtesting will not give such a feel. It is good to implement such an exercise before one starts with his or her own new system.
Now the second phase of the SIE will be starting on Monday. I thought now I can spend some time for this thread.
As I was looking at my old notes on experiments in TA to select something interesting to post, an often repeated compliant came to my mind. There were many telling me that there is nothing for us Newbee in this thread. I has always thought that thread was the right one for a newbee. Looks like I was mistaken.
So this time something for the newbee.. I will take up something very simple but something a new TA aspirant always face first…. The MACD.
So I will cover in a series of post ..”Trading the MACD”..
I plan to cover the following topics
Basics
Basic signals
A deeper look into the MACD to get additional information
Combining MACD with other Indicators
Afls
Finally a consolidated pdf file of entire discussion with charts.
(let me see how far I can go on this..
)
For a glimpse of what we will look at, eclosing a sample chart..
warm regards
karthik
Hi friends
The first round of the System Implementation Exercise (SIE) is concluding today. It has taught all the participants a lesson or other. For me it has shown how such an exercise with a new system tells so much about the drawbacks of the system. Any amount of Backtesting will not give such a feel. It is good to implement such an exercise before one starts with his or her own new system.
Now the second phase of the SIE will be starting on Monday. I thought now I can spend some time for this thread.
As I was looking at my old notes on experiments in TA to select something interesting to post, an often repeated compliant came to my mind. There were many telling me that there is nothing for us Newbee in this thread. I has always thought that thread was the right one for a newbee. Looks like I was mistaken.
So this time something for the newbee.. I will take up something very simple but something a new TA aspirant always face first…. The MACD.
So I will cover in a series of post ..”Trading the MACD”..
I plan to cover the following topics
Basics
Basic signals
A deeper look into the MACD to get additional information
Combining MACD with other Indicators
Afls
Finally a consolidated pdf file of entire discussion with charts.
(let me see how far I can go on this..
)For a glimpse of what we will look at, eclosing a sample chart..
warm regards
karthik
Last edited:
Hi Karthik,
Great Idea....I am sure u will cover this but also a look at MACD combinations for different periods such as daily, hourly and intraday charts. would there also be a logic why certain MACD combinations are better for daily and which will work the best for 5 minutes chart and why. Also will the combination we use for daily chart, change for a certain script ( maybe based on volatility).
I think these points if discussed will help all of us.
Rgds
Rahul
Great Idea....I am sure u will cover this but also a look at MACD combinations for different periods such as daily, hourly and intraday charts. would there also be a logic why certain MACD combinations are better for daily and which will work the best for 5 minutes chart and why. Also will the combination we use for daily chart, change for a certain script ( maybe based on volatility).
I think these points if discussed will help all of us.
Rgds
Rahul
Re: Experiments in Technical Analysis - Trading the MACD
Wow! Another Learning Opportunity.
Eagerly waiting for it to start.
Best Regards,
--Ashish
tradingtalks.blogspot.com
Wow! Another Learning Opportunity.
Eagerly waiting for it to start.
Best Regards,
--Ashish
tradingtalks.blogspot.com
Re: Experiments in Technical Analysis - Trading the MACD
Hi friends
First, Thanks to Jayant, Rahul and Ashish for the encouragement. I do hope this will be useful to newbees. My friends say that I have a knack for complicating simple things. I do hope that will not be the case here.
Most of you know the basics of MACD. Still for the sake of completeness I will explain in brief the basics.
The MACD or The Moving Average Convergence Divergence was by Gerald Appel, It is one of the most popular indicators. It is a very simple reliable Indicator. Also it is an Indicator a TA enthusiast gets introduced to first. The MACD is constructed by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. The MACD is considered to be a momentum oscillator though it is widely used by Trend followers.
The most popular formula for the MACD is the difference between the 26-day and 12-day exponential moving averages. I will use this standard setting and later if time permits I will try to present other combinations. A 9-day EMA of the MACD line is used as the signal line.
A positive MACD indicates that the shorter EMA is greater than the longer EMA indicating that momentum is positive. A rising MACD indicates the difference between the short EMA and the long EMA is increasing and in other words indicates a rising momentum. In the same way a negative MACD indicates that momentum is negative and a falling MACD indicates an increasing negative Momentum.
Refer chart-1
To be continued....
regards
Karthik
Hi friends
First, Thanks to Jayant, Rahul and Ashish for the encouragement. I do hope this will be useful to newbees. My friends say that I have a knack for complicating simple things. I do hope that will not be the case here.
Most of you know the basics of MACD. Still for the sake of completeness I will explain in brief the basics.
The MACD or The Moving Average Convergence Divergence was by Gerald Appel, It is one of the most popular indicators. It is a very simple reliable Indicator. Also it is an Indicator a TA enthusiast gets introduced to first. The MACD is constructed by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. The MACD is considered to be a momentum oscillator though it is widely used by Trend followers.
The most popular formula for the MACD is the difference between the 26-day and 12-day exponential moving averages. I will use this standard setting and later if time permits I will try to present other combinations. A 9-day EMA of the MACD line is used as the signal line.
A positive MACD indicates that the shorter EMA is greater than the longer EMA indicating that momentum is positive. A rising MACD indicates the difference between the short EMA and the long EMA is increasing and in other words indicates a rising momentum. In the same way a negative MACD indicates that momentum is negative and a falling MACD indicates an increasing negative Momentum.
Refer chart-1
To be continued....
regards
Karthik
Last edited:
Re: Experiments in Technical Analysis - Trading the MACD
Three common signals
Let us see in a little detail what happens when the moving average cross over and zero line cross over occurs.
Let us assume that the stock is in a downtrend and the MACD is below the zero line and below the signal line. Then when the Bullish moving average cross over (MACD crossing the signal) occurs the shorter EMA has started converging towards the long EMA indicating the negative momentum is waning. It does mean that the bullishness will continue. It may or may not. So a Buy when the Bullish cross over occurs does not always produce a good trade.
Now consider when the stock is in an up trend and the MACD is above zero and the signal line. If a Bearish cross over occurs (MACD crossing below the signal line) the short EMA has started to converge towards the long MA indicating that the positive momentum is waning. It again does not indicate that bearishness has set in. It may be just a pull back. The stock may dip and then continue its journey upwards.
When the MACD cross above the zero line it mean that the short EMA has actually crossed over the long EMA indicating that the momentum has indeed reversed from negative to positive. In the same manner the when the MACD crosses below the zero line it means the momentum has turned negative. The Bullish zero line cross over generally gives better trades. But many times it will notice you are entry is much delayed. The Bearish zero line cross over gives too much of your profits and some time one loses money too.
To summarize
Chart-2 illustrates some of these points.
to be continued...
regards
karthik
Three common signals
- MA cross over or signal line crossover. The basic and the most common is the signal line cross over. Buy when the MACD line crosses above the signal line and Sell when the MACD line crosses below the signals line.
- Zero Line crossover. Some use only the zero line cross over as signals. Buy when the MACD line crosses the zero line and Sell when the MACD line
- crosses below the zero line.
- Divergences
Let us see in a little detail what happens when the moving average cross over and zero line cross over occurs.
Let us assume that the stock is in a downtrend and the MACD is below the zero line and below the signal line. Then when the Bullish moving average cross over (MACD crossing the signal) occurs the shorter EMA has started converging towards the long EMA indicating the negative momentum is waning. It does mean that the bullishness will continue. It may or may not. So a Buy when the Bullish cross over occurs does not always produce a good trade.
Now consider when the stock is in an up trend and the MACD is above zero and the signal line. If a Bearish cross over occurs (MACD crossing below the signal line) the short EMA has started to converge towards the long MA indicating that the positive momentum is waning. It again does not indicate that bearishness has set in. It may be just a pull back. The stock may dip and then continue its journey upwards.
When the MACD cross above the zero line it mean that the short EMA has actually crossed over the long EMA indicating that the momentum has indeed reversed from negative to positive. In the same manner the when the MACD crosses below the zero line it means the momentum has turned negative. The Bullish zero line cross over generally gives better trades. But many times it will notice you are entry is much delayed. The Bearish zero line cross over gives too much of your profits and some time one loses money too.
To summarize
- Buying based on Bullish MA cross over does always produce good trades. However in many cases this does helps in early entry points. How to distinguish is the problem. Combining with other Indicators may help. We will explore this later.
- Selling based on Bearish MA cross over may take you out of the trade too soon. Again combining with other Indicator may be of help in deciding if it is time to get out.
- Bullish zero line cross over generally prove profitable. The drawback again the entry point may be delayed in many cases.
- Selling based on Bearish zero line cross over may give away too much of your profit. A trailing stop may help in over coming this issue
Chart-2 illustrates some of these points.
to be continued...
regards
karthik
Last edited:
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