iCharts Discussions

ajayhkaul · Yellow Belt Joined: 18 Jun 2009 Posts: 866

Thats the spirit rrk !... everyday is a new day in the market and we all (without exception) must keep learning with an open mind.

Padkondu · White Belt Joined: 23 Jan 2008 Posts: 120

"Hence message for padkondu, who has started his journey with MACD , --- its not MAGIC "
There are no young geniuses in this business, TA or FA !

Both require application, patience and discipline - so take what works for you.[/quote]
Dear ajay!

thanks for your insight in to technical indicators, MACD especially. I will always take suggestions from experts.

i neither started my journey with macd nor would i end with it. my journey into technical analysis started 5 years back, when i joined the i charts community.

if the word "magic" is reason for the trouble, here is the explanation. i spotted the 61.8% retracement coinsiding with the crossover of macd with signal line. i did make an attempt to find the relation with fib retracement and the macd cross over. that is all.

regards
Padkondu.

ajayhkaul · Yellow Belt Joined: 18 Jun 2009 Posts: 866

vinst · Black Belt Joined: 09 Jan 2007 Posts: 3303

Padkondu · White Belt Joined: 23 Jan 2008 Posts: 120

With the inspiration of ST and others, i am now posting this topic of “Capturing trend with MACD”.

1. MACD (moving average convergence and divergence), as the name itself reveals about this "trend indicator", it deals with convergence, divergence and crossover of two emas and consists of three parameter. the default set up for macd is 12/26/9. (to have better understanding about the behaviour of the indicator i suggest to put the 12ema and 26 ema on the chart along with MACD).

2. MACD consists of two lines; MACD line (blue) and the Signal line (red).
the value of MACD at any point = EMA (12) - EMA (26) or
EMA(first parameter) – EMA(second parameter)
the signal line is 9 period ema of MACD line.

3. so, here, i understand that the EMA itself being a lagging indicator of price with a smoothening factor. In macd (a) we are taking two emas and finding their difference for macd line, (b) taking the 9 period ema of macd for signal line. this is the very reason for the laggardness of MACD. thus, if one attempts to use macd for generating the buy/sell actions they are sure to run out of markets owing to this laggardness of indicators and thereby whipsaws. By the time the indicator gives the buy signal the stock may have moved much farther and may start taking a breather or correct or reverse. that is the reason for the several opinions against macd in this thread.

4. the main usage of macd is to identify trend , if there is one, in a particular time frame and then switch to some suitable entry/exit strategies for high probable trades with very good risk return ratio which shall be the ultimate objective of all traders.

5. Identification of trend using macd.

a. Macd line is above 0 and macd line is above signal line (Since macd line is above signal line, the histogram is also above 0 line.); this is a clear indication of up trend.

b. macd line is above 0 line, but belwo signal line (Since the macd line is below the signal line the histogram is also below the 0 line): the up trend is fading; leading to a consolidation (you can observe the continuation patterns such as horizontal price congestion, flags, pennanats, Ascending triangles tec., forming during these periods) which further may or may not lead to reversal of currnet up trend.

c. Macd line is below 0 and macd line is below signal line (since macd line is below signal line the histogram is also below 0): this is a clear indication of down trend.

d. macd line is below 0 but above signal line: this indicates a pull back or consolidation during a down trend which may lead to continuation of previous down trend or reversal of the down trend.

This is the basic interpretation of MACD as far as trend identification is concerned. One must understand the mostly the up trends are slow and rhythmic, while down trends are much faster & stronger, and as such the macd is at its best use during down trends and causes many whipsaws during prolonged sideways market.

This is not over. I would like to discuss a little advanced treatment of MACD, different setups for macd and their usage. Myself being a swing trader, I keep focusing only on swing trading methodologies.

Padkondu · White Belt Joined: 23 Jan 2008 Posts: 120