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Some Aspects of The MACD Indicator: Udo Stegen

The document discusses aspects of the Moving Average Convergence Divergence (MACD) indicator. It explains that MACD measures the distance between two exponential moving averages to identify convergence and divergence. It also provides interpretations of MACD components and discusses rules for identifying signals like entry and exit points using MACD.

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mpalladi
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194 views25 pages

Some Aspects of The MACD Indicator: Udo Stegen

The document discusses aspects of the Moving Average Convergence Divergence (MACD) indicator. It explains that MACD measures the distance between two exponential moving averages to identify convergence and divergence. It also provides interpretations of MACD components and discusses rules for identifying signals like entry and exit points using MACD.

Uploaded by

mpalladi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPS, PDF, TXT or read online on Scribd
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Some Aspects of the

MACD Indicator

Udo Stegen

© 2004 by Rettmer Trading Trust

© 2004 by Rettmer Trading Trust [email protected]


MACD Aspects
 Moving
 Average (always Exponential MA)
 Convergence and
 Divergence

MACD measures the distance between two EMAs and graphs their
relationship, as the two lines move closer together (“converge”)
and further apart (“diverge”).

© 2004 by Rettmer Trading Trust [email protected]


MACD Components

© 2004 by Rettmer Trading Trust [email protected]


MACD Delta: Visual Proof

© 2004 by Rettmer Trading Trust [email protected]


MACD: Interpretation
(a) Mathematical

Any Mathematicians here?


Any Physicists?

© 2004 by Rettmer Trading Trust [email protected]


MACD: Interpretation
(a) Mathematical

dP/dt = v
first derivative of travelled distance over time is velocity

dv/dt = a
first derivative of velocity is acceleration

© 2004 by Rettmer Trading Trust [email protected]


MACD: Interpretation
(b) Road-wise
Read red “Delta” line as “Speed”

© 2004 by Rettmer Trading Trust [email protected]


MACD: Interpretation
(b) Road-wise
Read red “Delta” line as “Speed”
at which the Price changes faster or slower than average
Positive : drive forward – price rises above average;
Negative: slow down/ reverse – price falls below average

© 2004 by Rettmer Trading Trust [email protected]


MACD: Interpretation
(b) Road-wise
Read red “Delta” line as “Speed”
at which the Price changes faster or slower than average
Positive : drive forward – price rises above average;
Negative: slow down/ reverse – price falls below average

Yellow “Histogram” is “Acceleration”

© 2004 by Rettmer Trading Trust [email protected]


MACD: Interpretation
(b) Road-wise
Read red “Delta” line as “Speed”
at which the Price changes faster or slower than average
Positive : drive forward – price rises above average;
Negative: slow down/ reverse – price falls below average

Yellow “Histogram” is “Acceleration”


at which the Speed changes faster or slower than average
Positive : accelerate – increase the speed
Negative: hit the brakes – slow down

© 2004 by Rettmer Trading Trust [email protected]


MACD: the Accelerator
Q: What comes first: Acceleration or Speed?

(Hint: Ignore friction; just roll along in Neutral.)

© 2004 by Rettmer Trading Trust [email protected]


MACD: the Accelerator
Q: What comes first: Acceleration or Speed?

A: Neutral means cruising at average speed.


To change, someone must step on a pedal.

─► “Mr Market, the Chauffeur”

© 2004 by Rettmer Trading Trust [email protected]


MACD: Effects of “the Pedal”

© 2004 by Rettmer Trading Trust [email protected]


MACD: Divergence
Conditions causing Divergence

 Sustained Trend
 Purposeful and Effective Use of Pedals
 Sufficient to reverse effects of Inertia

© 2004 by Rettmer Trading Trust [email protected]


MACD: Signs of Success
 “Action equals Reaction”
To neutralise the effects of acceleration over time, we
must apply the same amount of braking power over time.

 “… and then some more”


To reverse the trend, we must then apply more power in
the new (opposite) direction.

© 2004 by Rettmer Trading Trust [email protected]


MACD: Signs of Success

 Speed crossing zero,


momentum used up

 To start new trend,


apply more power

 How much?

© 2004 by Rettmer Trading Trust [email protected]


MACD: Enter Long – How long?
 Momentum used up, Will it turn?
 After enough initial Push, we’re cruising.

© 2004 by Rettmer Trading Trust [email protected]


MACD: Example HVN

© 2004 by Rettmer Trading Trust [email protected]


MACD: Divergence
 Divergence lines follow Trendline Rules
– Falling = Resistance
– Rising = Support
– Comparable Turning Points

Start: Determine a new trend in MACD (Delta or Histogram).


If corresponding Price trend “diverges”, we have Divergence.

© 2004 by Rettmer Trading Trust [email protected]


MACD: Entry Rules
 EstablishDivergence Interval
 Longest Histogram Bar sets Trigger
(Draw auto-extending Horizontal trendline)

 Enter on break of Trigger line


– OR -
 Wait for Delta Line to cross Zero
(depending on duration of prior trend)

© 2004 by Rettmer Trading Trust [email protected]


MACD: Exit Rules
 Days 1 to 4 after entry:
Be aware of potential “false break”.
 Stop-loss quickly
 While Speed stays on side of trade: Stay
 When Speed crosses Zero: Exit
 Or apply any Exit Rule from your Plan.

© 2004 by Rettmer Trading Trust [email protected]


MACD: Example BSL

© 2004 by Rettmer Trading Trust [email protected]


MACD: Rules Modified
 Divergence lines follow Trendline Rules
 Longest Histogram Bar sets Trigger
 Invalidated when
– Delta line crosses trendline extension
– Price line ceases to diverge
…but…
Do Not Ignore the Volume!
© 2004 by Rettmer Trading Trust [email protected]
MACD: The Missing Link

© 2004 by Rettmer Trading Trust [email protected]


Questions

???

© 2004 by Rettmer Trading Trust [email protected]

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