The MACD study can be interpreted like any other trend-following analysis: One line crossing another
indicates either a buy or sell signal. When the MACD crosses above the signal line, an uptrend may be
starting, suggesting a buy. Conversely, the crossing below the signal line may indicate a downtrend and
a sell signal. The crossover signals are more reliable when applied to weekly charts, though this indicator
may be applied to daily charts for short-term trading.
The MACD can signal overbought and oversold trends, if analyzed as an oscillator that fluctuates above
and below a zero line. The market is oversold (buy signal) when both lines are below zero, and it is
overbought (sell signal) when the two lines are above the zero line.
The MACD can also help identify divergences between the indicator and price activity, which may signal
trend reversals or trend losing momentum. A bearish divergence occurs when the MACD is making new
lows while prices fail to reach new lows. This can be an early signal of a downtrend losing momentum. A
bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both
of these signals are most serious when they occur at relatively overbought/oversold levels. Weekly charts
are more reliable than daily for divergence analysis with the MACD indicator.
For more details on the MACD, Appel has a book in print, entitled: "The Moving Average Convergence-
Divergence Trading Method."
As with most other computer-generated technical indicators, the MACD is a "secondary" indicator in our
trading toolbox. It is not as important as our "primary" technical indicators, such as trend lines, chart gaps,
chart patterns and fundamental analysis. I use the MACD to help me confirm signals that our primary
indicators may be sending.
That's it for now. Next time, we'll examine another important topic on your road to increased trading
success.
The more technical and analytical tools we have in our trading toolbox at our disposal, the better our
chances for success in trading. One of our favorite "secondary" trading tools is moving averages. First, let
us give you an explanation of moving averages, and then we’ll tell you how we use them.
Moving averages are one of the most commonly used technical tools. In a simple moving average, the
mathematical median of the underlying price is calculated over an observation period. Prices (usually
closing prices) over this period are added and then divided by the total number of time periods. Every day
of the observation period is given the same weighting in simple moving averages. Some moving averages
give greater weight to more recent prices in the observation period. These are called exponential or
weighted moving averages. In this educational feature, we’ll only discuss simple moving averages.
The length of time (the number of bars) calculated in a moving average is very important. Moving
averages with shorter time periods normally fluctuate and are likely to give more trading signals. Slower
moving averages use longer time periods and display a smoother moving average. The slower averages,
however, may be too slow to enable you to establish a long or short position effectively.
Moving averages follow the trend while smoothing the price movement. The simple moving average is
most commonly combined with other simple moving averages to indicate buy and sell signals. Some
traders use three moving averages. Their lengths typically consist of short, intermediate, and long-term
moving averages. A commonly used system in futures trading is 4-, 9-, and 18-period moving averages.
Keep in mind a time interval may be ticks, minutes, days, weeks, or even months. Typically, moving
averages are used in the shorter time periods, and not on the longer-term weekly and monthly bar charts.
The normal moving average “crossover” buy/sell signals are as follows: A buy signal is produced when
the shorter-term average crosses from below to above the longer-term average. Conversely, a sell signal
is issued when the shorter-term average crosses from above to below the longer-term average.
Another trading approach is to use closing prices with the moving averages. When the closing price is
above the moving average, maintain a long position. If the closing price falls below the moving average,
liquidate any long position and establish a short position.
Here is the important caveat about using moving averages when trading futures markets: They do not
work well in choppy or non-trending markets. You can develop a severe case of whiplash using moving
averages in choppy, sideways markets. Conversely, in trending markets, moving averages can work very
well.
In futures markets, our favorite moving averages are the 9- and 18-day. I have also used the 4-, 9- and
18-day moving averages on occasion.
When looking at a daily bar chart, you can plot different moving averages (provided you have the proper
charting software) and immediately see if they have worked well at providing buy and sell signals during
the past few months of price history on the chart.
We said we like the 9-day and 18-day moving averages for futures markets. For individual stocks, we
have used the 100-day moving average to determine if a stock is bullish or bearish. If the stock is above
the 100-day moving average, it is bullish. If the stock is below the 100-day moving average, it is bearish.
We also use the 100-day moving average to gauge the health of stock index futures markets.
One more bit of sage advice: Follow the 40-day moving average very closely--especially in the grain
futures. Thus, if you see a market that is getting ready to cross above or below the 40-day moving
average, it just may be that the funds could become more active.
We said earlier that simple moving averages are a "secondary" tool in our trading toolbox. Our primary
(most important) tools are basic chart patterns, trend lines and fundamental analysis. |