EMA
Exponential moving averages highlight recent changes in a stock's price. By comparing EMAs of different periods, the MACD line illustrates changes in the trend of a stock. Then by comparing that difference to an average, an analyst can chart subtle shifts in the stock's trend.
Exponential moving averages highlight recent changes in a stock's price. By comparing EMAs of different periods, the MACD line illustrates changes in the trend of a stock. Then by comparing that difference to an average, an analyst can chart subtle shifts in the stock's trend.
Since the MACD is based on moving averages, it is inherently a lagging indicator. As a metric of price trends, the MACD is less useful for stocks that are not trending or are trading erratically.
The period for the moving averages on which an MACD is based can vary, but the most commonly used parameters involve a faster EMA of 12 days, a slower EMA of 26 days, and the signal line as a 9 day EMA of the difference between the two. It is written in the form, MACD(faster, slower, signal) or in this case, MACD(12,26,9).
MACD = EMA[fast,12] – EMA[slow,26]
signal = EMA[period,9] of MACD
histogram = MACD – signal
signal = EMA[period,9] of MACD
histogram = MACD – signal
Signal line crossovers are the primary cues provided by the MACD. The standard interpretation is to buy when the MACD line crosses up through the signal line, or sell when it crosses down through the signal line.
The upwards move is called a bullish crossover and the downwards move a bearish crossover. Respectively, they indicate that the trend in the stock is about to accelerate in the direction of the crossover.
The upwards move is called a bullish crossover and the downwards move a bearish crossover. Respectively, they indicate that the trend in the stock is about to accelerate in the direction of the crossover.
The histogram shows when a crossing occurs. Since the histogram is the difference between the MACD line and the signal line, when they cross there is no difference between them.
The histogram can also help in visualizing when the two lines are approaching a crossover. Though it may show a difference, the changing size of the difference can indicate the acceleration of a trend. A narrowing histogram suggests a crossover may be approaching, and a widening histogram suggests that an ongoing trend is likely to get even stronger.
While it is theoretically possible for a trend to increase indefinitely, under normal circumstances, even stocks moving drastically will eventually slow down, lest they go up to infinity or down to nothing
The histogram can also help in visualizing when the two lines are approaching a crossover. Though it may show a difference, the changing size of the difference can indicate the acceleration of a trend. A narrowing histogram suggests a crossover may be approaching, and a widening histogram suggests that an ongoing trend is likely to get even stronger.
While it is theoretically possible for a trend to increase indefinitely, under normal circumstances, even stocks moving drastically will eventually slow down, lest they go up to infinity or down to nothing
Timing
The MACD is only as useful as the context in which it is applied. An analyst might apply the MACD to a weekly scale before looking at a daily scale, in order to avoid making short term trades against the direction of the intermediate trend.Analysts will also vary the parameters of the MACD to track trends of varying duration. One popular short-term set-up, for example, is the (5,35,5).
The MACD is only as useful as the context in which it is applied. An analyst might apply the MACD to a weekly scale before looking at a daily scale, in order to avoid making short term trades against the direction of the intermediate trend.Analysts will also vary the parameters of the MACD to track trends of varying duration. One popular short-term set-up, for example, is the (5,35,5).
False signals
Like any indicator, the MACD can generate false signals. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there was no bullish crossover, yet the stock accelerated suddenly upwards.
A prudent strategy would be to apply a filter to signal line crossovers to ensure that they will hold. An example of a price filter would be to buy if the MACD line breaks above the signal line and then remains above it for three days. As with any filtering strategy, this reduces both the probability of false signals as well as the frequency of missed profit.
Like any indicator, the MACD can generate false signals. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there was no bullish crossover, yet the stock accelerated suddenly upwards.
A prudent strategy would be to apply a filter to signal line crossovers to ensure that they will hold. An example of a price filter would be to buy if the MACD line breaks above the signal line and then remains above it for three days. As with any filtering strategy, this reduces both the probability of false signals as well as the frequency of missed profit.
Limitations
The MACD has often been criticized for failing to respond in very low or alternately very high volatility market conditions.Since the MACD measures the divergence between averages, it can only give meaningful feedback as trends change. Thus, the MACD is less useful if the market is not trending—trading sideways or trading erratically—making sudden, dramatic, and/or countervailing moves.
In a sideways market, the divergence between averages will not have a trend to illuminate. In an erratic market, the changes will happen too quickly to be picked up by moving averages or will cancel each other out, diminishing the MACDs usefulness. A partial caveat to this criticism is that whether a market is trending or volatile is always relative to a particular timeframe, and the MACD can be adjusted to shorter or longer spans.
Finally, though some analysts trade on technical indicators alone, the abundance of experts recommend a complete work-up of a company's business sectors, financial strength, past earnings, new products, management, and institutional buying. For more traditional investors, an indicator like the MACD may be used only to support a previously determined stock choice, or to select an ideal entry-point into a fundamentally sound stock
The MACD has often been criticized for failing to respond in very low or alternately very high volatility market conditions.Since the MACD measures the divergence between averages, it can only give meaningful feedback as trends change. Thus, the MACD is less useful if the market is not trending—trading sideways or trading erratically—making sudden, dramatic, and/or countervailing moves.
In a sideways market, the divergence between averages will not have a trend to illuminate. In an erratic market, the changes will happen too quickly to be picked up by moving averages or will cancel each other out, diminishing the MACDs usefulness. A partial caveat to this criticism is that whether a market is trending or volatile is always relative to a particular timeframe, and the MACD can be adjusted to shorter or longer spans.
Finally, though some analysts trade on technical indicators alone, the abundance of experts recommend a complete work-up of a company's business sectors, financial strength, past earnings, new products, management, and institutional buying. For more traditional investors, an indicator like the MACD may be used only to support a previously determined stock choice, or to select an ideal entry-point into a fundamentally sound stock
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