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[email protected] © 2004 by Rettmer Trading Trust Some Aspects of the MACD Indicator Udo Stegen © 2004 by Rettmer Trading Trust Slide 2
[email protected] MACD Aspects u Moving u Average (always Exponential MA) u Convergence and u Divergence MACD measures the distance between two EMAs and graphs their relationship, as the two lines move closer together (“converge”) and further apart (“diverge”). Slide 3
[email protected] © 2004 by Rettmer Trading Trust MACD Components Slide 4
[email protected] © 2004 by Rettmer Trading Trust MACD Delta: Visual Proof Slide 5
[email protected] © 2004 by Rettmer Trading Trust MACD: Interpretation (a) Mathematical Any Mathematicians here? Any Physicists? Slide 6
[email protected] © 2004 by Rettmer Trading Trust 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 Slide 7
[email protected] © 2004 by Rettmer Trading Trust MACD: Interpretation (b) Road-wise Read red “Delta” line as “Speed” Slide 8
[email protected] © 2004 by Rettmer Trading Trust 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 Slide 9
[email protected] © 2004 by Rettmer Trading Trust 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” Slide 10
[email protected] © 2004 by Rettmer Trading Trust 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 Slide 11
[email protected] © 2004 by Rettmer Trading Trust MACD: the Accelerator Q: What comes first: Acceleration or Speed? (Hint: Ignore friction; just roll along in Neutral.) Slide 12
[email protected] © 2004 by Rettmer Trading Trust 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” Slide 13
[email protected] © 2004 by Rettmer Trading Trust MACD: Effects of “the Pedal” Slide 14
[email protected] © 2004 by Rettmer Trading Trust MACD: Divergence Conditions causing Divergence u Sustained Trend u Purposeful and Effective Use of Pedals u Sufficient to reverse effects of Inertia Slide 15
[email protected] © 2004 by Rettmer Trading Trust MACD: Signs of Success u “Action equals Reaction” To neutralise the effects of acceleration over time, we must apply the same amount of braking power over time. u “… and then some more” To reverse the trend, we must then apply more power in the new (opposite) direction. Slide 16
[email protected] © 2004 by Rettmer Trading Trust MACD: Signs of Success u Speed crossing zero, momentum used up u To start new trend, apply more power u How much? Slide 17
[email protected] © 2004 by Rettmer Trading Trust MACD: Enter Long – How long? u Momentum used up, Will it turn? u After enough initial Push, we’re cruising. Slide 18
[email protected] © 2004 by Rettmer Trading Trust MACD: Example HVN Slide 19
[email protected] © 2004 by Rettmer Trading Trust MACD: Divergence u 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. Slide 20
[email protected] © 2004 by Rettmer Trading Trust MACD: Entry Rules u Establish Divergence Interval u Longest Histogram Bar sets Trigger (Draw auto-extending Horizontal trendline) u Enter on break of Trigger line – OR - u Wait for Delta Line to cross Zero (depending on duration of prior trend) Slide 21
[email protected] © 2004 by Rettmer Trading Trust MACD: Exit Rules u Days 1 to 4 after entry: Be aware of potential “false break”. u Stop-loss quickly u While Speed stays on side of trade: Stay u When Speed crosses Zero: Exit u Or apply any Exit Rule from your Plan. Slide 22
[email protected] © 2004 by Rettmer Trading Trust MACD: Example BSL Slide 23
[email protected] © 2004 by Rettmer Trading Trust MACD: Rules Modified u Divergence lines follow Trendline Rules u Longest Histogram Bar sets Trigger u Invalidated when – Delta line crosses trendline extension – Price line ceases to diverge …but… Do Not Ignore the Volume! Slide 24
[email protected] © 2004 by Rettmer Trading Trust MACD: The Missing Link Slide 25
[email protected] © 2004 by Rettmer Trading Trust Questions ???