Some Aspects of the MACD Indicator Udo Stegen © 2004 by Rettmer Trading Trust © 2004 by Rettmer Trading Trust [email protected].
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Transcript Some Aspects of the MACD Indicator Udo Stegen © 2004 by Rettmer Trading Trust © 2004 by Rettmer Trading Trust [email protected].
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”).
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MACD Components
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MACD Delta: Visual Proof
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MACD: Interpretation
(a) Mathematical
Any Mathematicians here?
Any Physicists?
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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
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MACD: Interpretation
(b) Road-wise
Read red “Delta” line as “Speed”
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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
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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”
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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
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MACD: the Accelerator
Q: What comes first: Acceleration or Speed?
(Hint: Ignore friction; just roll along in Neutral.)
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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”
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MACD: Effects of “the Pedal”
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MACD: Divergence
Conditions causing Divergence
Sustained Trend
Purposeful
and Effective Use of Pedals
Sufficient to reverse effects of Inertia
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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.
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MACD: Signs of Success
Speed
crossing zero,
momentum used up
To
start new trend,
apply more power
How
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much?
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MACD: Enter Long – How long?
Momentum
used up, Will it turn?
After enough initial Push, we’re cruising.
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MACD: Example HVN
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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.
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MACD: Entry Rules
Establish
Divergence 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)
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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.
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MACD: Example BSL
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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!
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MACD: The Missing Link
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Questions
???
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