[email protected] © 2004 by Rettmer Trading Trust Some Aspects of the MACD Indicator Udo Stegen © 2004 by Rettmer Trading Trust.

[email protected]@smartchat.net.au© 2004 by Rettmer Trading Trust© 2004 by Rettmer Trading Trust

Some Aspects of theMACD Indicator

Udo StegenUdo Stegen

© 2004 by Rettmer Trading Trust


MACD Aspects

MovingMoving Average Average (always (always ExponentialExponential MA) MA)

Convergence Convergence andand

DivergenceDivergence

MACD measures the distance between two EMAs and graphs their

relationship, as the two lines move closer together (“converge”)

and further apart (“diverge”).


MACD Components


MACD Delta: Visual Proof


MACD: Interpretation(a) Mathematical

Any Mathematicians here?Any Mathematicians here?

Any Physicists?Any Physicists?


MACD: Interpretation(a) Mathematical

dP/dt = vdP/dt = vfirst derivative of travelled distance over time is velocityfirst derivative of travelled distance over time is velocity

dv/dt = adv/dt = afirst derivative of velocity is accelerationfirst derivative of velocity is acceleration


MACD: Interpretation(b) Road-wise

Read red “Delta” line as “Speed” Read red “Delta” line as “Speed”



Read red “Delta” line as “Speed” Read red “Delta” line as “Speed” at which the Price changes faster or slower than averageat which the Price changes faster or slower than averagePositive : drive forward – price rises above average; Positive : drive forward – price rises above average; Negative: slow down/ reverse – price falls below averageNegative: slow down/ reverse – price falls below average




Yellow “Histogram” is “Acceleration” Yellow “Histogram” is “Acceleration”




Yellow “Histogram” is “Acceleration” Yellow “Histogram” is “Acceleration” at which the Speed changes faster or slower than average at which the Speed changes faster or slower than average Positive : accelerate – increase the speedPositive : accelerate – increase the speedNegative: hit the brakes – slow downNegative: hit the brakes – slow down


MACD: the Accelerator

Q: What comes first: Acceleration or Speed?Q: What comes first: Acceleration or Speed?

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


MACD: the Accelerator

Q: What comes first: Acceleration or Speed?Q: What comes first: Acceleration or Speed?

A: Neutral means cruising at average speed.A: Neutral means cruising at average speed. To change, someone must step on a pedal. To change, someone must step on a pedal.

─► “─► “Mr Market, the Chauffeur”Mr Market, the Chauffeur”


MACD: Effects of “the Pedal”


MACD: Divergence

Conditions causing DivergenceConditions causing Divergence

Sustained TrendSustained Trend Purposeful and Effective Use of PedalsPurposeful and Effective Use of Pedals Sufficient to reverse effects of InertiaSufficient to reverse effects of Inertia


MACD: Signs of Success

““Action equals Reaction”Action equals Reaction”To To neutraliseneutralise the effects of acceleration over time, we the effects of acceleration over time, we must apply the must apply the samesame amount of braking power over time. amount of braking power over time.

“… “… and then some more”and then some more”To To reversereverse the trend, we must then apply the trend, we must then apply moremore power in power in the new (opposite) direction.the new (opposite) direction.


MACD: Signs of Success

Speed crossing zero,Speed crossing zero,momentum used upmomentum used up

To start new trend,To start new trend,apply more powerapply more power

How much?How much?


MACD: Enter Long – How long?

Momentum used up, Will it turn?Momentum used up, Will it turn? After enough initial Push, we’re cruising.After enough initial Push, we’re cruising.


MACD: Example HVN


MACD: Divergence

Divergence lines follow Trendline RulesDivergence lines follow Trendline Rules– Falling = ResistanceFalling = Resistance– Rising = SupportRising = Support– Comparable Turning PointsComparable Turning Points

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

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


MACD: Entry Rules

Establish Divergence IntervalEstablish Divergence Interval Longest Histogram Bar sets TriggerLongest Histogram Bar sets Trigger

(Draw auto-extending Horizontal trendline)(Draw auto-extending Horizontal trendline)

Enter on break of Trigger lineEnter on break of Trigger line– OR -– OR -

Wait for Delta Line to cross ZeroWait for Delta Line to cross Zero(depending on duration of prior trend)(depending on duration of prior trend)


MACD: Exit Rules

Days 1 to 4 after entry:Days 1 to 4 after entry:Be aware of potential “false break”.Be aware of potential “false break”.

Stop-loss quicklyStop-loss quickly While Speed stays on side of trade: While Speed stays on side of trade: StayStay When Speed crosses Zero: When Speed crosses Zero: ExitExit Or apply any Exit Rule from your Plan.Or apply any Exit Rule from your Plan.


MACD: Example BSL


MACD: Rules Modified

Divergence lines follow Trendline RulesDivergence lines follow Trendline Rules Longest Histogram Bar sets TriggerLongest Histogram Bar sets Trigger Invalidated whenInvalidated when

– Delta line crosses trendline extensionDelta line crosses trendline extension– Price line ceases to divergePrice line ceases to diverge

……but…but…Do Not Ignore the Volume!Do Not Ignore the Volume!


MACD: The Missing Link


Questions

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[email protected] © 2004 by Rettmer Trading Trust Some Aspects of the MACD Indicator Udo Stegen © 2004 by Rettmer Trading Trust.

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