Another use of MACD.

Discussion in 'Technical Analysis' started by alex.samant, Oct 22, 2007.

  1. Hope you are not bored to death by the MACD. You shouldn't.

    Here's an interesting way to use the MACD indicator.

    This is for evaluating when markets are overbought and oversold using the MACD. Pretty weird, huh? :)

    Here i go:

    The premise of this particular use is that price swings above and below value represented by a moving average (exponential or not, but exponential would be better, more in the "present").

    What we want to do is measure how far has price distanced from it's moving average.

    I would select a 24EMA and since i am a daytrader and do not care about the close of the periods i use the (High+Low+Close)/3 as the base for the calculation.

    Now, i want to see how far has price gone above and below the 24 EMA of the H,L,C,3.

    For that i will plot a MACD(1,24,1) of the high+low+close, all divided by 3 also called the "typical price".

    So this will actually tell me, for each period, how far the typical price is from the 24EMA "value" line.

    Ok, now, i need to look back, in order to be able to evaluate if price is overbought or oversold.

    So let's look back 200 periods ago.

    The highest high of our MACD(1,26,1) is the maximum power of bulls over our 200 bar lookback period, and the lowest low of our MACD(1,26,1) is the maximum power of bears over our 200 bar lookback period.

    Whenever MACD(1,26,1) comes close to the maximum value it is overbought and whenever it comes close to it's minimum value, it's oversold.

    I ain't telling more. It depends on each one to test and see how his/her method can benefit from this rather rudimentary technique. I always liked simple stuff so that's why i develop simple stuff that anyone can use....

    Good luck.
  2. how about a picture
  3. how about plotting it on your charts and seeing how it behaves on relation to price... :)
  4. alex.samant: "how about plotting it on your charts"
    if I knew how to do that with MetaStock . . .
    I was hoping a picture would help
  5. It's simple, just input the 1,26,1 parameters in your MACD

    Anyways. It should look like this.

  6. Shall I explain...

    In the chart that i posted, you can see that the 0.0050 level of the MACD is where price is usually at a top. Each time price gets there are fails to go above, it takes a little breather and then it drops....

    This is very simple actually, but is suitable for guys who trade one singe market intraday as you need to get in tune with your levels....
  7. Im not sure I get it. the macd tells me that since it didnt make a new high when the stock did I should sell it? why not just use the rsi for that?
  8. you can use whatever you want and feel comfortable with. that's the most important thing.

    there are advantages and disadvantages to any tool. however, the difference between the RSI and this MACD (1, X, 1) (where X is your moving average that normally is support or resistance in an uptrend/downtrend) are that:

    RSI measures oversold/overbought conditions based on a range of prices that you manually define. When price exceeds that range up or down, RSI makes a new high.

    MACD (1, X, 1) measures overbought/oversold conditions based on the relationship with a moving average. Since the moving average is dynamic and travels with price, you can understand that, even if you break a range, you may not get overbought since the moving average travelled with price too (slow rises).

    These are the basic differences.

    Now, there is another subtlety of this MACD (1, X, 1) tool:

    This tool measures the power of the pushed above and below a moving average that you consider "value".

    You can define "support" as being a line drawn across two or more bottoms over the last 200 periods (can vary) and you can cosider resistance as being a line drawn across two or more tops over the last 200 periods (can vary).

    WHen price makes the indicator "test" those "resistance" and "support" levels it means that it's at it's current max or min, and there are two outcomes. A failure in those levels leads to further trend continuation, while a failure in the indicator to surpass those levels leads to a return to "value" or "normalcy".

    I am not saying this is "the tool". It's just something to use. Who feels comfortable with it, test it first, and then if you use, i hope you make some money. It won't save you from learning money management and practicing discipline, though :)
  9. Here's an example, for those who don't understand quite well, the concepts of "dynamic" support and resistance.

    The attached chart is a WEEKLY chart of the EURUSD showing 2006 and some of 2007.

    I haven't attached the monthly chart, but rest assured the EURO has been in an uptrend for the past 4,5 years maybe, so i will consider an overall bullish market.

    In the attached chart, you have May and April 2006 at dynamic resistance (indicator peaks at about the same levels). With the bullish market conditions i wouldn't have sold, but those who sold there had a little fun down, but then had to cover early by trailing the stop close.

    In late april, MACD (1,x,1) broke "resistance" and you could have entered long (overall market conditions being bullish and all...). You could have stayed in the trade until the new peak was retested in mid May.

    Next, in the same overall bullish conditons on the monthly chart, MACD (1,X,1) comes down to test dynamic resistance and in mid august, when the bottom was tested you could have gone long.

    October 2006 is another buy, with the same support line tested, and look at that go. Notice it stopped at a former dynamic resistance line up there.

    There is an even better situation to buy in the beginning of 2007, when the same dynamic support is tested.
    #10     Oct 25, 2007