MACD

My Analysis:

-Buy signal is generated when solid line crosses dotted line in Metastock.

-the dotted line is signal line which is EMA [9] of MACD indicator.

-Its easy to read this indicator but please read the MACD.pdf in trading E-books\MACD.pdf it explains clearly how to handle dips and hooks in MACD and trade it along with ADX.

Leon wilson

MACD-TrendTrading 3*

MACD-H-Reversal Trading 3* and Breakout Trading 2*

The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day Exponential Moving Averages (EMAs).

A signal line (or trigger line) is then formed by smoothing this with a further EMA. The standard period for this is 9 days,

The difference between the MACD and the signal line is often calculated and shown not as a line, but a solid block histogram style. This construction was made by Thomas Aspray in 1986. The calculation is simply

histogram = MACD − signal

MACD generates bullish signals from three main sources:

1. Positive Divergence

2. Bullish Moving Average Crossover

3. Bullish Centerline Crossover

MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals:

1. Negative Divergence

2. Bearish Moving Average Crossover

3. Bearish Centerline Crossover

Most Authors suggest using of MACD with other Indicators the following extract describes how to use MACD with ADX/Stochastic

 

Trading the MACD
There is a nice article in Trading E-books/MACD.pdf please refer to that, it explains using ADX and stochastics with MACD.

 

Most of the authors are warning on using just MACD/MACD-H as deciding factor to enter/exit the trade.

Entry and exit signals are rarely symmetrical. The indicator that gives you good entry signals is usually not the best indicator for exits; some other tool will do a better job. MACD lines give entry signals when the fast line crosses the slow line. If the fast line crosses above, it gives a signal to go long. When it crosses below, it gives a signal to sell short. Waiting for a crossover in the
opposite direction to close out a position is not a good idea because by that time a lion’s share of profits will have evaporated.

“According to Gerald Appel the creator of MACD, a single MACD study should never be used alone.At a minimum u need two MACD studies.if a single study is used, the MACD in a downtrend, for instance will generally develop a late buy signals and premature sell signals.So two studies are needed.The default periods of 12-26-9 are offered as a starting guideline by the originator of the study,appel. A short MA pairing might be near 6-19-9, and the longer study may use periods close to the default like 13-26-9.As the markets to advance faster than they advance.you may need 4 MACD studies two MACD studies using faster MA pairings in declining markets and two MACD studies using slower MA pairings in raising markets.So  the bear market studies may need two studies that use 6-19-9 and 13-26-9, while the bull market may nees two studies that use 5-24-8for ione and 5-34-5 or 19-39-9 for the other.You need to do your own testing to select suitable values for you.It is important to know that trend is present before applying MACD.To determine the trend is present Appel uses 50 day MA on prices.The above extract is taken from Appel seminars.”

From

Technical Analysis for the Trading Professional

By Constance M. Brown

MACD Benefits
One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend in one indicator. As a trend-following indicator, it will not be wrong for very long. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security. By using Exponential Moving Averages (EMAs), as opposed to Simple Moving Averages (SMAs), some of the lag has been taken out.

As a momentum indicator, MACD has the ability to foreshadow moves in the underlying security. MACD divergences can be key factors in predicting a trend change. A Negative Divergence signals that bullish momentum is waning, and there could be a potential change in trend from bullish to bearish. This can serve as an alert for traders to take some profits in long positions, or for aggressive traders to consider initiating a short position.

MACD can be applied to daily, weekly or monthly charts. MACD represents the convergence and divergence of two moving averages. The standard setting for MACD is the difference between the 12 and 26-period EMA. However, any combination of moving averages can be used. The set of moving averages used in MACD can be tailored for each individual security. For weekly charts, a faster set of moving averages may be appropriate. For volatile stocks, slower moving averages may be needed to help smooth the data. Given that level of flexibility, each individual should adjust the MACD to suit his or her own trading style, objectives and risk tolerance.

MACD Drawbacks
One of the beneficial aspects of the MACD is also one of its drawbacks. Moving averages, be they simple, exponential or weighted, are lagging indicators. Even though MACD represents the difference between two moving averages, there can still be some lag in the indicator itself. This is more likely to be the case with weekly charts than daily charts. One solution to this problem is the use of the MACD-Histogram.

MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels that historically represent overbought and oversold levels, MACD does not have any upper or lower limits to bind its movement. MACD can continue to overextend beyond historical extremes.

MACD calculates the absolute difference between two moving averages and not the percentage difference. MACD is calculated by subtracting one moving average from the other. As a security increases in price, the difference (both positive and negative) between the two moving averages is destined to grow. This makes its difficult to compare MACD levels over a long period of time, especially for stocks that have grown exponentially.