In trading stocks, how does the MACD (Moving Average Convergence Divergence) technical indicator really work?

Question

In trading stocks, how does the MACD (Moving Average Convergence Divergence) technical indicator really work?

Answer 1

Weighting the numbers with an inverse exponential value places more importance on recent prices than on older prices and is a technique known as windowing in digital signal processing. The reason why it's necessary for digital signal processing is to minimize artifacts that can arise such as multiples of your window size. For example a Fast Fourier Transform (FFT) of a 9 day SMA will give you a significant component at a frequency that's the inverse of 9 days and a misinterpretation of the result may lead you to believe that the 9 pattern repeats every 9 days. Hence the EMA is a primitive attempt to remove indications of fictitious cycles from the analysis.



Much of what's done in technical analysis would be considered crude and primitive by DSP standards but together with human intuition can still be very effective.



This wasn't a big deal in the old days as technical analysts were more of the draw straight lines on a piece of semi-log paper which by the way is a way of solving partial differential equations in engineering and was how the control system for a Boeing 747 was designed but now that Wallstreet has been hiring Financial Engineers to perform the calculations on computers, windowing the data has become more important.



There are many different types of data windows and each has it's own unique effect on the artifacts (called aliasing) they introduce into the result, if you don't understand these windows, you're likely to place significance on the artifacts when they should be ignored, many swing traders are just unwittingly trading on the artifacts giving Financial Engineers opportunities to extract wealth.



If you want to learn about the relationship between straight lines on semi-log graph paper and PDE's, lookup Bode Plots and spectral analysis. Note not all PDE's can be solved by Bode plots, in the undergraduate course, the final exam is always on the same 20 problems every year. In the graduate level course, you learn why, those are the only problems easily solved, every other case requires complex manipulations to reduce them to one of those 20 special cases.

Answer 2

I suggest you look a book called.... A beginners guide to Short term trading, by Toni Turner Bought this book a few years back for 3.99 in the discount section at borders. Book is very useful in short term indicators and what to look for, research all the indicators in the book. I myself like yahoo charts.

Answer 3

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Answer 4

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You will first need to know what exactly Binary Options trading is, whilst this may seem like common sense many people just have a vague idea of what is involved and the exact risks attached to any trade, so make sure you fully understand the difference for example between actually buying a fixed asset and trading in Binary Options as the two could not be more different.



Next you will need to become something of an investigative journalist when you start trading in Binary Options and by this we mean you need to have a nose for a news story that is going to have a dramatic effect on whatever it is you intend to trade, and one way for you to do this is to keep fully abreast of all the daily financial news stories as this is the only way you are going to be able to make an informed decision on the movement of any Binary Options you are trading.

Answer 5

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Answer 6

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Answer 7

Indicators are just a crutch for reading actual price patterns. I would recommend learning how to read the price patterns first. I've included a good course that teaches how to do this. http://www.Swingtraderguide.com

Answer 8

You are really asking two questions: (1) how is the MA CD constructed and(2) can you give me an edge in swing trading



the best place to learn the details to answer question one is at the chart [e-mail] which will give you a complete technical and mathematical explanation for how the indicator is constructed and how it is generally interpreted. You have identified the default settings for the indicator and that is a reasonable place to start, since most people will use the default settings when making their decisions. You should know that only a small percentage of the daily volume in the stock market is contributed by retail individual traders and so, like all technical analysis, this indicator should be taken with a grain of salt. It can provide a certain amount of insight provided you don't try to turn it into a Holy Grail system.



In general, the MACD is examining the difference between a fast trend in a slow trend, and the idea is to find a moment in the normal oscillation of a stock so that after it has gone through. Of selling and consolidation and begins to make an upward move, thus reversing the trend, you can detect the state change and climb aboard for a swing trade. In this case you're looking for the fast moving average to cross over the slow-moving average below the zero line. This is the earliest indication in the system that a change in trend has occurred and your theoretically getting alerted at a time when you can still have a favorable move ahead of you.



This leads us to question two: will this indicator work for me.



Like many pieces of technical analysis, this one has been studied to death and there are a number of automated systems that will take advantage of the insights that this indicator will offer. By itself, the indicator will not provide you a standalone system. However it can still be used in conjunction with other indicators like market condition, volatility, rate of change and average true range to give you insights into swing trade opportunities. Be careful that you don't over complicate a trading system; if you simple indicators are far better than too many.



I recommend you consult the work of Dr. Alexander elder to learn how to apply some simple oscillators to swing trading time frames it. His book trade for a living is excellent. Good luck

Answer 9

honestly it really doesn't work. After running a couple backtests the formula was about flat with the benchmark (over a 9 yr. period).

Answer 10

I think it is a waste of time to look at this indicator. Try following the VIX. Changes in the VIX are about the only indicator I will even consider.