Experiments in Technical Analysis

[softtouch]

Re: Experiments in Technical Analysis - Trading the MACD

Three common signals

1. 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.
   
2. 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
3. crosses below the zero line.
   
4. 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

1. 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.
   
2. 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.
   
3. Bullish zero line cross over generally prove profitable. The drawback again the entry point may be delayed in many cases.
   
4. 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

Anant / Karthik,
Do you have any exploration formula for metastock to find out the Buy Signal & Sell Signal for MABIUTS System developed by Karthik Marar ?

Thanks
Softtouch

 

[karthikmarar]

Hi Softtouch

I had posted a Metastock exploration for the original mabiuts in the begining of this thread. here is the link.

http://www.traderji.com/52463-post43.html

regards

karthik

 

[softtouch]

Hi Softtouch

I had posted a Metastock exploration for the original mabiuts in the begining of this thread. here is the link.

http://www.traderji.com/52463-post43.html

regards

karthik

Karthik,

Here i am exactly looking for exploration formula which can give me buy signal and sell signal generated based on new end of day data.....that can help me to find out the buy & sell generated for stocks............but the formula you posted gives 50% stocks where buy and sell signal generated long back instead of today......i hope u understand my question.

Thanks
Softtouch.

 

[asnavale]

Hi Karthik,

Very good topic explained in a very simple manner. Clear Charts to aid the understanding even for biginners. I wish you success in this experiment and hope this also will lead to a good duscussion and experimentation by all the boarders. Thank you for taking up the subject.

WISHING YOU A VERY HAPPY AND PROSPEROUS SANKRANTI/PONGAL

Regards

-Anant

 

[karthikmarar]

Hi softtouch

Here is the corrected MS exploration for Mabiuts.

regards

Karthik

 

[karthikmarar]

Re: Experiments in Technical Analysis - Trading the MACD

Hi Friends

Thanks Rajeev and Ananth. I sure hope this will be useful and other too will share their experience with MACD for everybody to learn.

Ananth, Wishing you and all members of the forum a happy Shankaranti and Pongal

Let us continue with our discussion on MACD.......

One of the most important signals based on the MACD is DIVERGENCE. We will postpone discussion on this till little later.

Now Let us take a deeper look at the MACD charts and try to learn a little more about the additional signals that we get and how to trade them.
So far we were talking about Bullish crossover after a downtrend. In this case the Bullish crossover occurred below the zero line. However the Bullish crossover can occur above the zero line. Such crossover occurs when the stock dips temporarily before proceeding with the up trend. Such crossovers above the zero line produce some excellent trades.

Bearish crossovers occurring above the zero line generally acts as warning signals as it indicates waning of the positive momentum. Bearish crossover below the zero line indicates strong bearishness.

For the making the discussion more interesting we will first make a system with the following criteria.

BUY when there is a Bullish MA crossover.
SELL when there is a Bearish MA crossover.

Additionally the zero line bullish crossovers will be marked with an encircled number 1 with an arrow pointing upwards in order to indicate that the momentum has indeed reversed.

Bullish crossovers above the zero line will be marked an encircled number 2 and arrow pointing upwards indicating good trade opportunities.

Similarly bearish MA crossover above the zero line will marked 3 and bearish crossover of the zero line will be marked 4.

A chart and an Indicator with these signals enclosed

Next we will see if we can find more signals…

regards

Karthik

 

[rahulg77]

Hi Karthik,

I was just watching a old movie on cable which I love and I think i can aptly put the name of the movie here Lage Raho Munna Bhai . Great work for the forum.

Rgds

Rahul

 

[aca_trader]

Re: Experiments in Technical Analysis - Trading the MACD

Hi Friends

BUY when there is a Bullish MA crossover.
SELL when there is a Bearish MA crossover.

Additionally the zero line bullish crossovers will be marked with an encircled number 1 with an arrow pointing upwards in order to indicate that the momentum has indeed reversed.

Bullish crossovers above the zero line will be marked an encircled number 2 and arrow pointing upwards indicating good trade opportunities.

Similarly bearish zero line crossover will marked 3 and bearish crossover above zero line will be marked 4.

A chart and an Indicator with these signals enclosed

Next we will see if we can find more signals…

regards

Karthik

Excellent Work! If you present indicators in such a beautiful manner, I fear death of a pattern trader.

BTW, did you mean to mention below zero line instead of above zero line for (4); marked in Red in quoted post?

Best Regards,
--Ashish

 

[asnavale]

Re: Experiments in Technical Analysis - Trading the MACD

Hi Ashish,

You are right. It should have been above zero for circled 3 and zero line cross over for circled 4. Must be a typo.

-Anant

 

[asnavale]

Re: Experiments in Technical Analysis - Trading the MACD

Three common signals

..........................

To summarize

1. Bullish zero line cross over generally prove profitable. The drawback again the entry point may be delayed in many cases.
   
2. 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

.........................

regards

karthik

Hi Karthik,

Excellant explanation again with lucid charts to make the point clear.

Forgive me if I am jumping forward. You can probably use Zero Lag MACD to overcome the delays. I am sure you are going to discuss this later. Just I am mentioning this so that it will be remembered.

Regards

-Anant