Experiments in Technical Analysis

Hi Friends

Hope to complete the Trading the MACD series in the next two days.

WEEKLY MACD HISTOGRAMS

Next we will see how to use the Weekly Histogram with our daily MACD chart. Amibroker is wonderful software, which enables plotting of the weekly Histogram in our daily chart. Again we will plot the weekly MACD Histogram as a ribbon. We will color code it for easy understanding.
The color-coding will be as follows

Histogram above zero and rising – Dark yellow
Histogram Above zero and declining - Yellow
Histogram below zero and declining - Blue
Histogram below zero and rising - Sky blue

Trading clues:
Entries when the weekly MACD is positive, the Weekly Histograms turns positive and the daily Histogram is positive gives good trades.
Shorts when the Weekly Histogram goes below zero, weekly MACD declines / turn negative and the daily Histograms is negative gives good trades.
One can define many rules in combining the Weekly MACD and MACD Histograms with the daily MACD and Daily Histograms. I will leave that to you. Chart –10 provides some examples.

You would have noticed that it would be difficult to put these rules into a definite mechanical Trading system. It takes a bit of eyeballing and with a keen eye it is easy to pick some good trades. Of course one can run a scan to get a short list of stocks with zero line crossover, power dips and power hooks etc. Then it becomes necessary to eyeball the charts. I will post a scan afl towards the end of this discussion. The expert programmers can definitely come up with much better scans.

To Be continued...

regards

Karthik

Hi Friends

Thanks to the extended weekend we are enjoying here I am able to look at the market and it does feel good posting again the forum.

The nifty seems to in a interesting situation. Nifty has broken some important levels. After a long time the nifty has made a lower high and then a lower low. Theoretically this makes Nifty poised for an intermediate down trend. Of course nifty has been defying all technically indicators..(Maybe due to recently reported manipulations by the D company). Anyway the coming week will be quite interesting with the budget round the corner.

Some important levels on the downside could be 3881-85, 3838-41, 3771 , 3732 etc. On the upper side 3955 is important. If nifty closes above this on Monday it will be good. 4175 has become a significant level to watch for.

Let me continue with the Trading the MACD series..

DIVERGENCE

Next we will look at Divergences in the MACD. In technical Analysis Divergence is said to occur when an Indicator movement does not agree with the price movement. Divergence can be Bullish or bearish. If the indicator is making lower highs when the price is making a higher high there is supposed to a bearish divergence. In the same way when the Indicator makes higher lows when the price makes lower lows there is a Bullish divergence. Divergence indicates a reversal in the current trend.

We can use Divergence in the MACD itself or in the MACD histogram. Dr. Elder considered Divergences in the MACD Histograms as one of the most powerful signals available to the Technical Analyst.

However in case of Divergence one has to wait for a confirmation. Convergences are known to fail frequently. Such failures were quite evident on the Nifty in the recent past.

An example of a Bearish Divergence shown in the chart of Apollo tyre (Chart-11) clearly forewarn the impending weakness

An Example of Bullish Divergence is given in the chart of Asian Electric (Chart-12). When the stock was making a lower low the MACD made a Higher Low in July last.

To be continued…

Regards

Karthik

Hi Friends

Continuing with the Divergence...

Now let us look at the Divergences in MACD Histogram. I find divergences in Histogram more useful than divergence in the MACD itself. It is also one of the favorite tools for Dr.Elder.

Many times the Histogram throws up divergence even when there is no divergences detected in the MACD. Similar to the MACD divergence divergence on the histogram occurs when the peaks do not correlate to the stock peaks and troughs. A bullish Divergence occurs when the histograms makes a negative peak smaller than the previous one when the stocks make a lower low. In the same manner a Bearish divergence occurs when the histogram makes a positive peak smaller than the previous one and the stock make a higher high.

Chart –13 and Chart –14 provides some examples.

Regards

Karthik

Hi Friends

Continuing with the "Trading the MACD" discussion

Finally it always good to look at the volume while looking at the MACD. Combing Volume with MACD helps us to get onto some really good moves. There could be many ways to combine this. One could just use a simple moving average of the volume or look at some volume-based indicator. OBV indicator with a 30 day moving average of the same does work as a good confirmatory Indicator.

We can also derive a MACD with a volume bias. There are many ways to do that. I will not go into the details of these here. I will provide a simple example here.

Create a new variable V= sum(C*V)n / sum (V)n

Now create a MACD of this variable with n=12 and n=26.

I will leave the experimentation to you. Just enclosing the chart of this volume biased MACD with the normal MACD

Next we will conclude thus discussion with a brief look on the Pros and Cons of MACD.

Regards

Karthik

Hi Karthik,

The line in RED above has a variable V on the LHS. But V is used for Volume on RHS (V is a reserved symbol). Shouldn't we use some other identifier for the new variable? Such as 'var' or 'newvar' or some such thing?

Regards

-Anant

Anant,
Var is also a reserved symbol in MS.

Asish

Ananth, asish

Nice to know you guys go through these posts seriously

True, V is a reserved letter. Please do change it to something like CV (not creditviolet ... close volume biased... )

regards

Karthik

Friends,

Now it is time to conclude this discussion on trading the MACD. Before that we will just look at the pros and cons of the MACD.

MACD-PROS

MACD can be a trend following as well as a momentum Indicator. Since we are using two moving averages it makes a good trend following Indicator. As a momentum Indicator it captures the underlying momentum and that is the reason divergences are very effective in case of MACD. Divergence forewarns the traders of the impending weakness and reversals. MACD can be used on any time frame effectively. MACD is one of the most widely followed Indicators and that makes it self-fulfilling and effective.

MACD- CONS

Since MACD is based on moving averages the inherent qualities of lag and whipsaws are also reflected in the MACD. MACD as a momentum Indicator does not work well as a indicator of over bought and oversold levels.

END NOTE

MACD used properly can be one of the simplest and rewarding tool for the Technical Analyst. However it does have drawbacks and combining it with other Indicators makes it very effective.

One can try the MACD with different combination of the moving averages instead of the standard 12, 26. Many people use a shorter period for example 8,17,9 for Buy and longer ones 12,26,9 for sell.

Also one can experiment with MACD of other types of moving averages like weighted Moving averages, Adaptive moving averages like KAMA, VIDYA, and MAMA etc.

I hope this discussion was useful especially to the newbie.

Happy Experimenting

Warm regards

Karthik

Friends,

And for those who would like to keep a copy of the Trading the MACD discussion a pdf version is avaliable for download at

http://www.************/dir/1136409/6...6/sharing.html

Regards

karthik

Tq very much Karthik, we are very lucky to have a Technical Expert like you sharing your thoughts and programming skills with us!! Now we have more knowledge to reduce our losses and hopefully, to gain more!!