I understand the basics concept of how the moving average convergence/divergence is derived. I also understand the relationship between MACD and the MACD EMA. What I do not understand is the relationship the MACD and MACD EMA lines have with the divergence. For instance, what difference does it make in the diagram of MSFT whether or not the MACD and MACD EMA lines are above or below the 0 divergence line? Anyone able to help me out on this one?
The divergence line is usually another running MA or EMA (9 units typically) that shows how the other two moving averages correlate to that "trigger line" moving average. For more insight, please visit: http://www.equis.com/Education/TAAZ/?page=66
This is actually two questions, what the MACD has to do with the 0 line and what it has to do with the divergence. The divergence is simply the distance between the two MACD lines. As that distance narrows, the histogram bars will shorten. As it widens, they will lengthen. This enables you to use the histogram as a momentum indicator (i.e., you can toss out Momentum and Rate of Change). The same dynamic applies to the ADX and DMI, i.e., the ADX represents the distance between DM+ and DM-. As for the 0 line, conservative traders will often wait for at least one line to cross that line. Even more conservative traders will wait for both. However, more aggressive traders will argue that unless there is a strong trend in place, one is more likely to be trading at or near the end of the move than the beginning, and that one is giving up too much of the move by waiting for all this confirmation (the more conservative would say that without that confirmation, one is just guessing, and if the trend isn't strong, why bother?). Very aggressive traders will consider a trade at the first uptick in the histogram (if it's under the 0 line, the first downtick if it's above). This will occur even before the lines have crossed each other, much less the 0 line. In this regard, the MACD and histogram can substitute to a large extent for the stochastic and RSI. So, as with everything else, it all depends on your risk tolerance, how aggressive you are, how comfortable you are with your strategy and tactics, how disciplined you are, etc. as to how you make use of this tool. --Db
phoenix, Have you done any fooling around with the parameters as far as using macd and the dmi adx study? Using that combination alone I was able to stabalize a bad drawdown. But I was too scared to change the preset values because at the time I couldn't hit the broadside of a barn. When the macd was above I would only look for long trades and when it was down I would try short trades, and no matter what, when the dmi crossed I would exit, win lose or draw. But I was never able to use either of these for entry. I did quite a bit of fooling around later with the dmi parameters, but never did experiment with macd values. When I started using Bollinger bands, I replaced the macd with rsi. Macd is funny, just as you say, by the time it crosses it is often too late, but oh my gosh, there were some days when it kept you long or short all day long, and those were very very good times indeed.
Just a thought... maybe you're fussin' around for the "proper" way to use MACD when it's not really good for much of anything?
You're going to get plenty of suggestions on settings, either here or from books, but what you use depends on what kind of trader you are and what you want. When the market's trending, I don't use indicators at all as I don't find them helpful or even useful. Rather I focus on support/resistance and trendlines. A congested market, however, is something else. In any case, it looks as though you're searching for a mechanical system, and there you have a nearly infinite number of choices. However, you may find your particular answer sooner if you divide everything up into trending indicators and oscillating indicators and pick one of each. There's really no point, for example, in using both MACD/MACD histogram and ADX/DMI since they measure pretty much the same thing. A better choice would be, for example, MACD/stochastic (or RSI or any of the other oscillating indicators), switching from one to the other based on whether the market is trending or not. But getting back to specific settings, I can't be of much help because I don't care; I just use whatever is the default. However, I use indicators as an aid, not as a crutch, so the fine points of using one setting over another are lost on me. Try using the defaults until you find an indicator that makes sense to you, then tailor it to suit. --Db
That's what I use to think when I didn't understand indicators. Now that I understand them, when people tell me I don't need them, I just smile and never argue. Man that use to burn me up when I was trying to get on some indicator users nerves. I thought they were wimps who couldn't defend themselves. Now I see they just realised there was no point in trying to talk sense with me.
but seriously gnome, most of this stuff comes into my life on a bad day. Maybe the 1 min chart is sort of bullish and the 3 min is sort of bearish. I just look around for anything I can use. Maybe I see 3 higher rallies in prices and 3 lower rallies on the macd. Maybe I say, classic divergence, just what I am looking for. Maybe I say, I want to get long, but not until everybody agrees. Maybe I say, this market doesn't know what it wants to do, and I'm only looking for easy money. Did I use the macd? Yeah I think so. How do I use it? I don't know, I don't even understand it.