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In my previous post I mentioned that I found interesting videos from Adam Hewison. Click here for a timely example which includes MACD divergence analysis of the S&P 500 near the end of the video. (no registration required to view the video)
Tags: MACD, MACD divergence, SPY
People at the MoneyShow and elsewhere ask me, “why MACD?”
The short answer is that seeing how MACD Divergences pointed out some very good times to buy stocks and ETFs motivated me to want to use MACD. So I learned the basics, made some good trades and a little money. It wasn’t all roses however and taking a few too many losses prompted me to do all this backtesting.
You can see how the MACD divergence signaled good times to buy in this 10 min. video and summary about the SPY.
Since not everyone will want to take 10 min to watch the video, here’s a brief summary:
The MACD positive divergence in Oct 2002 and the one in March 2003 originally got me interested in MACD divergence. In the TradeStation screenshot below, you can see the green MACD technical indicator at bottom showing a divergence as price hits a new low but the MACD does not confirm with its own new low. This is a classic MACD divergence. The dark green line is the backtesting strategy registering a profitable trade between Oct 2002 when it got the MACD bullish divergence buy signal and Sept 2003 when it got the MACD bearish divergence sell signal. Click the charts to enlarge them.
Another interesting MACD divergence on the SPY takes place in Aug 2004. The SPY had been choppy in a trading range when the MACD bullish divergence signaled that this Aug bottom might be different. Sure enough the SPY broke out of the range. See the TradeStation screenshot below of the trade taken by the backtesting engine.
What has the MACD divergence done for us lately? Check out this chart of a MACD divergence catching a good time to buy in March 2009. This most recent profitable trade on the SPY (green line in the chart below) comes on the heels of three attempts to find a bottom during the credit crisis that didn’t work out. So you can see from this chart that nothing is perfect and you can’t expect every trade to be a winner. In fact, this is a sample size of only one — SPY. You should not rely on this to be representative of future performance.
These charts and video show why I am interested in the MACD. I want an objective signal of good times to buy like Oct 2002 and March 2009. However, I learned the hard way that its not enough to just see a few good examples and then go trade. This is the beginning of the research, not the end.
Are you interested in using MACD to find good times to buy stocks and ETFs? If so, here’s three steps you can take today:
1. Find out the historical track record of various MACD divergence signals. I recommend reading the TruthAbout MACD series from BackTesting Reports. You can either get the reports directly from this link, or visit the new truthaboutmacd.com for a free video and CD-ROM. If you are serious about trading with the MACD, the performance data in the backtesting reports is a must-read.
2. Learn to recognize a MACD divergence when it happens at the right edge of the chart. The BackTesting Reports have some example charts, and the “Power Tools” book has a chapter on the MACD, or get the original Master Class to see Gerald Appel explain the MACD himself.
3. Get software to scan the market for MACD divergence conditions. These signals don’t come around all that often so it helps to be able to find them when/where they occur. The software I use to scan the US stock market for MACD divergence is available by clicking here.
( MACD stands for Moving Average Convergence Divergence. SPY is the Exchange Traded Fund (ETF) of the S&P 500 which is often used as a proxy for the whole US Market.)
Updated 10/16/09 to fix typos.
Tags: ETF, MACD, MACD divergence, signal, SPY, strategy, TradeStation, trading
See the press release at the link below for the full announcement:
The July meeting of the Trade Station user group will be held at the Los Gatos High School’s community room on Saturday, July 11 at 10:00 am. Our speaker will be one of the members of our group, Jackie Ann Patterson. Jackie is a stock trader and the editor of BackTesting Report. She will give us a sneak preview of her Aug 2009 SF Money Show talk titled “The Truth About MACD”. Drawing on her extensive backtesting of the MACD across 14 years of data on 7147 stocks, Jackie will highlight what worked and what didn’t, and reveal the top mistakes even the experts make when using MACD lines and histogram. She will apply the lessons learned to several example charts, showing which buy/sell signals resulted in profits over 70% of the time plus how to do even better even with a lower win rate. To take advantage of the most powerful MACD divergence signals, Jackie will demonstrate the semi-automatic process she uses to scan the markets for high-gain opportunities every evening. We’ll do this with the latest end-of-day data so we can discuss whatever signals are active and current markets of interest to the audience.
Hope you can attend this meeting. Jim
Tags: MACD, MACD divergence, TradeStation
If you’ve ever wondered:
then you might considering investing in a copy of the MACD Sell Signals BackTesting Report.
The MACD Sell Signal Report builds on two of the MACD Buy Signals to backtest basic exit signals using MACD lines and histograms. This report gives the first look at Maximum Adverse Excursion – how far the position went against you — as a way to measure the risk of each strategy. It also compares three different types of stop losses to reduce risk. Read this report to find out how you would have fared by following the MACD and MACD Histogram.
Subscribe to BackTesting Report Now or order MACD Reports separately
Tags: ATR, backtesting, exit, linkedin, MACD, MACD Histogram, MAE, Maximum Adverse Excursion, risk, selling, stop
Updated June 03, 2009…this promotion has ended. Congratulations to Mike T. – the winner of the drawing for a free subscription to BackTesting Report. You can still get the chapter and more in the MACD Buy Signals BackTesting Report.
After you download and read the free chapter of the report above, leave a comment on this post to enter the drawing. If you’ve never commented on a blog before, you just click the comment link at the top of this post and scroll to the bottom to find a form to enter your comment.
On June 3, 2009 at the LA Trader’s Expo, I’ll randomly select a comment and that person will receive a 12-issue subscription to BackTesting Report, a $127 value. You do need to download the report to enter because comment spam is so prevalent that we have to cross-check the comments with the mailing list.You don’t need to be at the Trader’s Expo to win.
(Updated from 5/11 and reposted on 5/15 due to technical difficulties. If you sent a comment before 5/15, please resend.)
Tags: free report, linkedin, MACD, MACD Histogram
StockFinder® may be my new favorite tool, but its not without quirks. While creating custom indicators, scans and layouts for BackTesting Report subscribers, I came across its shortcomings with the MACD. The screenshot above shows a StockFinder layout with 2 MACD of different parameter settings. The candlesticks on the price chart are color-coded green for buy signals, red for sell signals by one MACD strategy, and blue for a different MACD strategy’s sell signals.
The two main problems with StockFinder’s built-in MACDs are:
1. When you insert a MACD or MACD Histogram, they come up with simple moving averages by default instead of the standard exponential moving averages. You need to click on them and on the right of the edit menu, change from simple to exponential moving averages.
2. If you change the parameter settings, say from 12-26-9 to 19-39-9, the MACD signal line still does a 9-bar moving average of the default 12-26 MACD line. You need to delete the signal line and recreate it as a 9-bar exponential moving average of the current MACD line.
StockFinder also takes a few extra clicks to get the MACD lines and MACD Histogram in the same pane. They need to be added individually and take up too much space if left in separate panes.
StockFinder doesn’t come with Appel’s Histogram but I found it very easy to add as a custom indicator in StockFinder’s Real Code. For example see the StockFinder screenshot below, which shows Appel’s Histogram in an implementation of a MACD strategy excerpt from Gerald Appel’s Technical Analysis Power Tools for Active Investors.
In conclusion, StockFinder can do useful and powerful things but be sure to tweak the settings if you put a MACD on its charts.
Tags: Appels Histogram, MACD, MACD Histogram, Stockfinder
July 13, 2009: BestFreeCharts.com is renamed to FreeStockCharts.com and this post has been updated accordingly.
FreeStockCharts.com makes nifty charts like StockFinder.
Click here for a quick little set of instructions for plotting the MACD and MACD Histogram on FreeStockCharts.com
Overall, I found FreeStockCharts.com very straightforward to use. It is limited to the basic charting but offers real-time data from BATS. The interface is very similar to StockFinder, which I like, but the free tool doesn’t have the scanner, backtester, custom indicators, and industry groups which make the paid tool extremely useful.
Tags: BestFreeCharts, MACD, MACD Histogram, Stockfinder
 Reveals Widespread MACD Misconceptions – Almost, April 16, 2009Buried in this book are clues that point to widespread misconceptions about the MACD. The clues are Experienced traders may spot the differences between Appel’s approach in this book and what is often bandied about regarding the MACD. I think it would have been even more helpful if the author had addressed the differences and pointed out any common misconceptions directly. Having done some backtesting of the MACD, I think the book needs more specific, objective details on how to anticipate MACD lines crossing and recommendations for using the MACD histogram or Appel’s histogram, as I have come to call his way of plotting it. I reckon that reading the book years ago and thoroughly understanding the nuances of how Gerald Appel uses the MACD would have helped me, especially in 2007. Since then, I’ve seen the value of backtesting. The good news is that many sections of this book show historical test results. However, I was a little disappointed not to find backtesting results for the MACD in this book. Test data is rarely included in trading texts so it is probably a bonus to get the data that is presented in this book. The author emphasizes synergy and gives specific instructions for using other market-timing power tools — along with the MACD and sometimes even without the MACD. In fact, the MACD is only one chapter. But MACD is why I came to the book and I suspect many other readers do the same, so that’s where I focused most of this review. Besides the MACD, the book has instructions on key indicators of market internals and health. It also gives rules of thumb for estimating duration and extent of market moves, using chart patterns, and it covers moving average channels. Bottom line: Worth reading to get the benefit of the experience of Gerald Appel, the man who invented the MACD and has seen a lot more than the current boom/bust cycle. |
(Backtesting Blog is an Amazon Associate
Tags: backtesting, Gerald Appel, indicator, MACD
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