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Chilidawgz Jun 27 2011, 06:10 PM

BTW, I referenced Trader Nick above and his MACD. I nabbed this off the internet before all his postings and work were removed after he passed.

Nick's Technical Techniques By Nick Proffitt

USING MACD

While there is no Holy Grail of technical indicators, every analyst has a favorite, and I'm no different. For me it's the Moving Average Convergence/Divergence Indicator, or MACD. I like it best in its histogram form, but more on that in a moment.

There are a couple of things I like about MACD. It's a price-based indicator. And it combines the trend-following characteristics of moving averages with the overbought/oversold scale of an oscillator.

When they speak of MACD, most analysts are referring to the most well known and widely used "line" form of the indicator, which uses three exponential moving averages (EMA's) to produce two chart lines. The first line is the MACD Line, the result of subtracting a 26 period EMA from a 12 period EMA. This MACD Line is smoothed by a second line, called the Signal Line, which is nothing more than a 9 period EMA. (You can set your own periods, of course, but 26-12-9 are standard, and are what I use). The MACD Line is the faster of the two and is usually green in color on the chart (the slower Signal Line is red). These two lines fluctuate above and below a Zero Line.

Used as a trend following tool, MACD is a simple crossover indicator with very simple buy/sell signals. You buy when the faster green MACD Line crosses above the slower red Signal Line, and you sell when the MACD Line crosses below the Signal Line. Even used in this, its most primitive form, the indicator can provide the basis of a perfectly adequate trading system that will keep you in sych with the trend.

If you want to get a little fancier, you can also watch for divergences between the MACD action and price action. For example, if the price is still rising but the MACD Line rolls over and starts downward, crossing or threatening to cross the Signal Line, you know it's time to sell or to at least tighten your stops. You can also use a combination of daily and weekly MACD readings to fine tune your buying and selling; taking the direction of your trade from the MACD indicator on your weekly chart, but picking your exact entry point from the MACD reading on the daily chart. (If it's a buy entry you're looking for, you'd want the weekly indicator to be bullishly rising but the daily indicator to dropping, so you get an advantageous entry price).

Finally, you can use MACD's Zero Line as an overbought/oversold oscillator to calibrate your buying and selling even more finely. For example, a buy signal crossover that occurs below the Zero Line would be confirmed when both the MACD Line and Signal Line cross into bullish territory above the Zero Line.

Now we come to the MACD Histogram, which is the form of the indicator I prefer, and the one I use exclusively.

The MACD Histogram plots the DIFFERENCE between the MACD Line and the Signal Line and presents the information in the form of vertical bars (a histogram) which fluctuate above or below a Zero Line.

In some ways the histogram is just another way to look at line MACD, because the histogram's current bar will cross above or below the Zero Line at the exact same time the regular indicator's MACD Line crosses above or below the Signal Line. And just as with regular line MACD, the histogram issues concurrent buy and sell signals. As traditionally used, when the histogram's vertical bars cross above the Zero Line, it's a buy signal. When the bars cross below the Zero Line it's a sell signal.

But because the histogram tracks the DIFFERENCE between the two MACD lines, you get a bonus. You can see at a glance when the relationship between the two lines begins to strengthen or weaken. For example, the histogram's bars may be in bullish territory, well above the Zero Line, but if the the current bar drops below the immediately preceding bar, you know that while still in a bullish configuration, the spread between the MACD Line and Signal Line is narrowing. It's a sign that price momentum may be running out of gas.

As I noted above, the traditional use of the MACD Histogram is to buy when the bars cross above the Zero Line and to sell when they cross below the Zero Line. This is NOT the way I use it. I have found that on the BUY side at least, waiting for a Zero Line crossover is much too slow and usually misses the initial, often meatiest part of a price advance.

So how do I use MACD Histogram? First, I want the indicator's bars to be well into negative, oversold territory. In other words, well below the Zero Line; and the farther below, the better. Next, I look for the FIRST uptick on the weekly chart. By an uptick, I mean that the current bar suddenly stops dropping and and instead pops higher than the immediate preceeding bar. It's still in negative territory below the Zero Line, of course, but now it's moving up. IF this move is corroborated by other, faster indicators on the weekly chart, and IF the MACD Histogram bars on the daily chart are also climbing or just bottoming, the result is one of the best, and safest, buy signals I know of.

Using the MACD Histogram for selling purposes is a little tricker. You can, if you choose, simply invert the buy setup. In this case, you would have watched happily as the histogram bars marched steadily upwards, crossing the Zero Line, and going far into overbought territory. Then, when you see the first downtick (the current bar drops below the preceding bar), you sell. But in my experience, simply inverting the buy criteria often leads to whipsaws or selling too soon. I've employed various selling strategies over the years. For a long time, I thought it best to wait for the histogram bar to drop all the way back and penetrate the Zero Line before selling. More recently, I've leaned toward splitting the difference, looking for a top in the histogram, then selling after I get two or three consecutive downticks. It helps to watch the histogram's action on the daily chart in these cases. It may also be a good idea to rely more on other indicators for selling, rather than just the MACD histogram alone.

http://www.traders-talk.com/mb2/lofiversion/index.php/t132050.html