Dear Friends,
Let it be any approach that you may adopt to limit the number stocks to track and trade, as we all know, the important issue is to have a set up to trade.
Friends! first thing to be registered is to go logical in our trade set up. It means we should understand a qualitative logic to fix the set up and quantitative logic to
practice it diligently.
I first explain the quantitative part of the logic.
Friends, presuming we chose MACD Divergence as an element for our trade set up as most of us know that MACD Divergence generally reverses the trend.
But why? Why MACD Divergence reverses the trend?
Once we understand the logic behind this we will not hesitate to follow the trade signal given by MACD Divergence.
Let's address this MACD Divergence Logic.
For those who are not aware of MACD Divergence:
When any asset price is making higher highs and MACD is making Lower Highs, then we call it a Divergence. In such cases generally the asset price will crack down.
Simlarly when any asset is making lower lows and MACD is making higher lows, then also it is MACD Divergence. In such cases generally the asset price will take an upward move.
This is known to most of us.
Now let us understand the Logic.
For this first let's understand how MACD is built. MACD is nothing but the difference between a Lower Period Moving (generally 12) and a Higher Period Moving Average(generally
26).
And MACD = Lower Period Moving Average (LPMA) Value - Higher Period Moving Average (HPMA) Value.
Whenever the LPMA value is higher that the HPMA value, MACD goes positive and vice versa.
SO here if security price is making higher highs and MACD fails to make higher highs means the HPMA value (though is less than LPMA value) is increasing with a better pace than
the pace at the beginning of the trend. Friends, try understanding that a long period MA is increasing at a better rate of change. Means people who have been in that security for a
considerable amount of time are now only seeing their investment performing. So having waited for a longer period, naturally they try booking profits.
And the outsiders who keep observing the stock generally don't prefer the purchase at those prices. So less amount of buying interest and more amount of selling pressure in the
form of profit booking naturally keeps pressure on the security's price and thus its price takes a correction.
And now let's see the "What If" Scenario.
Even after MACD Divergence takes place, sometimes the prices go rallying parabolic. It means that even when a scenario like more profit booking interest and less buying interest
prevails, in case the prices are moving up means that all the selling in the form of profit booking has been absorbed by buyers.
When there is a little amount of buying interest, who are these buyers.
Naturally anyone who values the stock worth buying only will buy. But in case the pressure of profit booking is absorbed, it means it is Strong Hands who are valuing it better
even at these prices. As the exits took place form the people who have held it a longer time and the dumb money is not valuing it better and Smart Money is entering at these
levels, the prices will go up parabolic.
So Divergence failure moves go parabolic. Hope you got my point.
And now "what if" for this divergence failure rally fails. There is every possibility that anything might happen in markets.
Presuming we have seen divergence, divergence failure as the prices started penetrating the earlier resistances, we expect that a parabolic rally should fall in place.
If that doesn't happen don't go surprised. Just apply time stop and exit. Please tell me what you do when your car moves in 20kmph when it is in 4th gear? Just do the same here
in case you are caught in a divergence failure entry and price is not moving, as we know that it should be a 4th gear scenario.
Friends! I appeal to everyone of you to develop this logical insight for any logic you want to adopt to trade the markets. Then your actions can go with confidence and surprises
will run away.
Happy Practicing Technicals
Ajayakumar
Let it be any approach that you may adopt to limit the number stocks to track and trade, as we all know, the important issue is to have a set up to trade.
Friends! first thing to be registered is to go logical in our trade set up. It means we should understand a qualitative logic to fix the set up and quantitative logic to
practice it diligently.
I first explain the quantitative part of the logic.
Friends, presuming we chose MACD Divergence as an element for our trade set up as most of us know that MACD Divergence generally reverses the trend.
But why? Why MACD Divergence reverses the trend?
Once we understand the logic behind this we will not hesitate to follow the trade signal given by MACD Divergence.
Let's address this MACD Divergence Logic.
For those who are not aware of MACD Divergence:
When any asset price is making higher highs and MACD is making Lower Highs, then we call it a Divergence. In such cases generally the asset price will crack down.
Simlarly when any asset is making lower lows and MACD is making higher lows, then also it is MACD Divergence. In such cases generally the asset price will take an upward move.
This is known to most of us.
Now let us understand the Logic.
For this first let's understand how MACD is built. MACD is nothing but the difference between a Lower Period Moving (generally 12) and a Higher Period Moving Average(generally
26).
And MACD = Lower Period Moving Average (LPMA) Value - Higher Period Moving Average (HPMA) Value.
Whenever the LPMA value is higher that the HPMA value, MACD goes positive and vice versa.
SO here if security price is making higher highs and MACD fails to make higher highs means the HPMA value (though is less than LPMA value) is increasing with a better pace than
the pace at the beginning of the trend. Friends, try understanding that a long period MA is increasing at a better rate of change. Means people who have been in that security for a
considerable amount of time are now only seeing their investment performing. So having waited for a longer period, naturally they try booking profits.
And the outsiders who keep observing the stock generally don't prefer the purchase at those prices. So less amount of buying interest and more amount of selling pressure in the
form of profit booking naturally keeps pressure on the security's price and thus its price takes a correction.
And now let's see the "What If" Scenario.
Even after MACD Divergence takes place, sometimes the prices go rallying parabolic. It means that even when a scenario like more profit booking interest and less buying interest
prevails, in case the prices are moving up means that all the selling in the form of profit booking has been absorbed by buyers.
When there is a little amount of buying interest, who are these buyers.
Naturally anyone who values the stock worth buying only will buy. But in case the pressure of profit booking is absorbed, it means it is Strong Hands who are valuing it better
even at these prices. As the exits took place form the people who have held it a longer time and the dumb money is not valuing it better and Smart Money is entering at these
levels, the prices will go up parabolic.
So Divergence failure moves go parabolic. Hope you got my point.
And now "what if" for this divergence failure rally fails. There is every possibility that anything might happen in markets.
Presuming we have seen divergence, divergence failure as the prices started penetrating the earlier resistances, we expect that a parabolic rally should fall in place.
If that doesn't happen don't go surprised. Just apply time stop and exit. Please tell me what you do when your car moves in 20kmph when it is in 4th gear? Just do the same here
in case you are caught in a divergence failure entry and price is not moving, as we know that it should be a 4th gear scenario.
Friends! I appeal to everyone of you to develop this logical insight for any logic you want to adopt to trade the markets. Then your actions can go with confidence and surprises
will run away.
Happy Practicing Technicals
Ajayakumar
This might help you to some extent regarding the logic part of MACD Divergence. Please go by this and once you are through, if required, I can further try giving more insight to the extent I know. If you feel this is not what you are looking for, I am sorry to have disturbed you.
Happy practicing technicals
Ajayakumar
