Technical Analysis MACD

Technical Analysis
MOVING AVERAGE CONVERGENCE-DIVERGENCE (MACD)
The moving average convergence-divergence, referred to as MACD

was developed by Gerald Appel in 1979 as a tool to trade the stock
market. It works in all markets equally well, however. Generally,
indicators work in either trending markets or choppy markets. MACD
is best used in trending markets, where you want to stay on board the
major trend and ignore minor adverse price excursions. It is also best
used on long term charts like weekly and monthly data. If used in
nontrending markets results will generally be unsatisfactory.
MACD is calculated based on 3 exponentially smoothed moving

averages (ema) that are shown as 2 lines. The first line represents the
difference between a 12 period ema and a 26 period ema. The second
line (signal line) is a 9 period ema of the first line. Appel recommends
using different numbers for the buy side versus the sell side. He keeps
the signal line consistent at 9 and for the sell side uses the 12 and 26
(as above) but for the buy side uses 8 and 17 instead. You would
display both indicators at the same time. You will see that the buy side
is quicker and more prone to whipsaw, and you must decide whether
or not it works for you. The MACD is plotted either as 2 lines or as a
histogram of the difference between the two or both formats on the
same indicator. See below.
In the chart above, the "D" stands for divergence in the histogram. In
the first case, a bearish divergence, occurred when a new high was hit
in price but not a new high in the MACD histogram. Conversely, in the
second instance a new low was hit in price but not in the histogram.
These warnings were then confirmed by the MACD crossover. Note I
used the conventional 12/26/9 inputs. Seems pretty straight forward
and an easy money maker! Unfortunately it doesn't work this neatly
all the time. Look at the chart below.
The above chart of the Swiss Franc shows both MACDs, the buy side
and sell side version. You can see the buy side 8/17 is faster but full
of false signals. Here is a case where we had a bullish divergence at
#1 but would most likely have been stopped out when a lower low
was made in early March at #2. In this case the divergence really only
told us of a trend change from down to sideways. Also, the crossover
following this did not preclude any sort of significant move and in fact
during March and April is just sideways choppy action, so this
indicator should be discarded for something that works better in this
kind of market. In choppy markets you definitely want to ignore
crossovers but you can see that the bearish divergence at #3 did
preclude a 3 day sell off.
One way some traders use the MACD is to take the crossover trades
when the lines are in predetermined overbought or oversold areas. In
the above chart of the NYA I selected 4.0 as overbought and -4.0 as
oversold. The only crossover trades that would have been taken were
at #1 and #2 which would have avoided quite a few whipsaws in
between. One problem with this is determining the O/B and O/S
areas. Appel had set +-2.50 for the S&P, now it routinely trades in the
+-10.00 range (see top chart above) and 1.50 for the NYA. So this
parameter would need to be optimized. Also, sometimes you find the
lines (not the histogram) diverging with price near tops or bottoms so
the actual crossover may take place between the overbought or
oversold zones and therefore, on a purely mechanical system, missing
the big trades.
Another way to trade with the MACD is by looking for trendline breaks.
In the corn chart above line A is based on a regression trendline of the
macd average(blue) and line B is a trendline drawn off the pivots of
the macd line (red). The first line to break was too soon, would have
resulted in being stopped out. After both trendlines had been broken
AND the crossover had occurred all you had was a sideways market.
This doesn't appear to me to be too exciting a method.
Probably the best method in using MACD is in identifying divergences,
some of which I have shown in previous charts. The above chart,
however also illustrates this both in histogram divergence (line A) and
MACD lines divergence (line B). In this case we have a triple top with
each successive swing diverging in the MACD. Whenever you have the
first divergence you need to enter on a break out because of the
potential for the triple top as above. Also, I have found more reliability
on the histogram divergence, look at the following chart.
On the chart above notice how the divergence in the histogram
resulted in a significant trend change whereas the MACD lines did not
diverge at the bottom! This is why I tend to use the histogram and
pretty much ignore the lines.
Generally, MACD used alone can be a 50% winner at best. Always, use
it in conjunction or in confirmation with other methods. Major trends
can be identified by using longer term MACD to dictate the direction of
trades to take in the shorter time frame. For example use weekly
MACD to confirm daily patterns only taking trades in the direction of
the weekly MACD. Since this oscillator works best in trending markets,
you could filter the times to use MACD by only employing it as a
system when the ADX is rising, meaning the market is trending and
when the ADX is dropping or under 15 then ignore the MACD.

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Technical Analysis

MOVING AVERAGE CONVERGENCE-DIVERGENCE (MACD)

The moving average convergence-divergence, referred to as MACD

MACD is calculated based on 3 exponentially smoothed moving

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