What are the key chapters?
- ch 3, MA
- ch 8, MACD
- ch 9, MA trading channels
What are the different types of moving average (eg EMA) and what are their
What are the most effective MA long range timeframes (50/200 day) ?
- Long term not as useful for day trading, 5d MA is best
= Action points
Calculate 10 day, 5 day, 5 min MACD for all NASDAQ stocks in Sep/Aug 2011.
Find stocks above their long term (10-30) week MA
- how many stocks on average?
- how long do they stay above their long term MA?
What are your long term entry signals?
- Gainers/MACD/MA ?
- = Notes
- a series of diminishing upside pulses suggests the end of a trend
- a series of increasing upside pulses suggest further advances
- stock markets are described as bullish when they are above their 30 week MA
- 10 or 20 week time periods may
- Market stages: transition, rising, topping, declining, basing.
- Rate of change indicator
- Momentum (golf ball driven off the tee metaphor)
- Should be positive during an uptrend
- Overbought/sold means momentum is out of normal range
- > Not sure how useful momentum is for predicting price action
- the weekly breadth impulse signal is based upon the princi-
ple that strong initial impulses in market advances—the rapid development of over-
bought, or extended to the upside momentum readingsare actually more IikeIy to
be the precursor to further advances than to downside market reversals.
- EMA of issued shares, # advancing/declining, differential
- Daily-Based Breadth Impulse Signal generates buy signals when it rises to or above
- 61.5%; such signals are cancelled when the indicator declines to or below 49%. Signals occur
- infrequently but have been very reliable historicall
- Only 26 signals generated in 34 years! Is this still the case?
- subtracting a longer-term exponential moving average
- from a shorter-term exponential moving average of prices or other measure
- generally rises if shorter-term trends are gaining strength and
- generally declines if shorter-term trends are losing strength
- Downtrends are below 0 OR above 0 and falling
- Uptrends are above 0 and rising
- Long term average is 2-3x the shorter MA
- MACD signals are more likely to prove reliable if shorter-term MACD signals an
- confirmed by longer-term trends in the stock market, perhaps reflected by longer
- term MACD patterns.
- the signal line is an exponential average of MACD levels, not of
- the price of the investment vehicle or index that is being tracked.
- created employing three-day to nine-day exponential averages of MACD lines.
- the shorter the average is, the more sensitive the signal line will be.
- crossings of MACD from below to above its signal line can
- be taken as confirmations of buy signals originally indicated when changes in
- direction have taken place in MACD from down to up.
- signal line crossings take place after MACD lines change direction
- but usually before MACD limes have crossed the 0 line.
- greater net gains generally occur if
- reversals in MACD (especially slower-moving combinations) are employed for buy-
- ing and selling rather than crossings of signal lines.
- > is this because its not a strong uptrend util it crosses the 0 line?
- (crossing the signal line could merely be downtrend rally)
- Buy signals are much more reliable when the MACD has crossed from above to
- below 0 at some time since the most recent sell signal.
- The MACD does not
- have to be below 0 at the time of the buy signal, but it should have been below
- 0 at some time since the start of the recent decline.
- Negative divergences are said to take place when price levels of the investment in
- question reach new highs, but measures that reflect upside market momentum fail
- to reach new positive areas.
- Positive divergences are said to take place when price levels of the investment in
- question fall to new lows for the cycle, but measures that reflect downside market
- momentum fail to decline to more negative areas.
- Divergences suggest a more or less imminent market reversal ahead,
- aka Down/Up ward rally
- more accurate MACD buy and sell signals can often be secured by
- using more sensitive MACD combinations for buying purposes and less sensitive MACD
- combinations for selling purposes.
- Stock prices decline at more rapid rates than they rise
- You should maintain at least two MACD combinations: a faster one for buying
- and a slower one for selling.
- When market trends are very positive, buy very fast and sell very slow. You can
- employ the 6-19 combination for buying, or you can employ the somewhat more
- reliable 12-26 combination. The 19- to 39day combination is used for selling.
- the use o f a slower MACD combination oroduced more time-oly sell signals than
- if the mbre rapid MACD combination, excellent for buying during this period,
- was used for selling as well.
- Exit signals
- The stock market must be in an uptrend that can be defined by a rising 50-day
- moving average. A slow MACD combination is employed for selling.
- MACD does encounter occasional difficulty in dealing with
- steadily trending, narrow-channeled market advances or declines.
- Intraday price ranges are often fairly narrow, so it i more important in day
- trading than in position trading to establish positions as early as possible.
- > Should you buy below the 0 line? This should be tested!
- ability to define market re-entry junctures following serious intermediate- and long-
- term market declines
- Recommended time frames:
- 1, 5, 20 days
- 5, 30, 6 mins
- Signal lines will usually be six- to
- nine-unit exponential moving averages of the MACD lines. Shorter-term signal lines
- will often produce more timely signals but will also be more prone to false signals
- and whipsaws.
- maintain an appropriatetrend-defining moving average. The 50-unit moving average tends to work well
MA trading channels
- moving averages are tools for smoothing price data that
- clarify the direction and strength of underlying market trends by removing noise
- associated with short-term price fluctuations
- The longer the term of the moving
- average is, the longer the trend it will reflect, and the smoother and slower changes
- will be in direction of the average.
- Uses +/- 8% instead of std dev Bollinger bands
- Uses Relative Strength Indicator (RSI), a measure of market momentum
- If a market top or market low indicated by the action of price move-
- ment within the moving average trading channel is confirmed by supporting
- technical indicators, the odds of a trend reversal taking place increase. A syner-
- gistic approach to trading bands is definitely useful.
- > Can you use RSI as a confirming sell signal?
- 20 day MA = approx. 40 day trend
- Putting it all together
- Identify long term trend (eg 200d MA)
Lessons learned after 40 years
- The news/media are usually the last to know
- Attend meetups/conferences but work alone
- Keep results private
- traders often tend to close out their stron-
- gest positions too early (locking up the profit) and maintain their weakest
- positions for too long
- even the best timing models tend to be profitable only a
- certain percentage of the time, but their winning trades are much larger, on
- average, than their losing trades
- The name of the game is to make a good (but not unreasonably good) return
- for your time and capital, not to feel “smart.”
- Don’t confuse rising stock prices with being a financial genius
- For most people, in-and-out trading will not be as profitable as well-considered
- intermediate-term trading, . It is not easy to overcome the additional costs in
- transaction expenses and bid-ask spreads involved in day trading and very
- short-term trading
- It is better to miss a profit than to take a loss
- it is probably best not to operate at the market opening.
- Do not enter into an invested position without an exit plan.
- It is much better to trade with no more capital than you can comfortably risk
- Make note of your losing transactions. Have you violated some basic rules of
- trading or investing because of some emotional reason? There will be losses.
- Not every losing trade is a mistake. The stock market, at best, is a game of
- There is no need to be invested in the stock market at all times. If mat-
- ters appear unclear or if you are less certain than usual (there’s no such thing as
- certainty regarding stocks), be free to simply stand aside until matters clarify.