MACD Histogram Divergence or MACDH Divergence occurs when price action is not confirmed by the common MACD Histogram.    The top picture is a screenshot of a daily chart of SPY.  The price is plotted as daily bars in the top section.  In the middle, is the MACD indicator with yellow bars for the MACD Histogram (MACDH), yellow MACD line and blue signal line.   The bottom plot is volume.

The MACD Histogram Divergence is marked by green price bars.  It is a MACDH positive divergence and generally considered a bullish signal.  The green arrows are drawn to illustrate the nature of the MACDH Divergence:  the price  makes a lower low while the MACDH indicator makes a higher low.   Click on the chart – twice - to enlarge it for a better view.

One interesting thing to note is that the MACD lines themselves are not showing a divergence at the same time as the MACDH divergence.   It is not necessary for the two types of divergence to occur together.   In this example, the MACD divergence happens a little later, at the 3rd new low of price.   As it happens, the price makes a longer rally from that divergence point.

A MACDH negative divergence is generally considered a bearish signal.  It is the opposite situation from a positive divergence.   A negative divergence  is said to occur when price makes a new high but the MACD Histogram indicator makes a lower high.   This is illustrated by the red arrows in the screenshot below of a daily chart of Citibank, NYSE: C

To learn more about trading with MACD, including detailed data comparing the historical performance of MACD Histogram Divergences with MACD Lines Divergences, visit the TruthAboutMACD.com and watch a free video.

Tags: MACD, MACD Histogram, MACD Histogram divergence, macdh

The new Signals pages give you a snapshot of the MACD divergence signals across all NASDAQ stocks.   This gives you a quick and easy way to find these elusive signals without flipping through thousands of charts.

In keeping with our mission as an educational resource, these MACD divergence signals are posted to show you an easy way to find examples for further study.   Before trading, we strongly enourage you to assess the track record for divergences — it is not perfect — by reading either the reports or videos in the Truth About MACD Series.

The divergences sought and presented by the scanners are:  

• MACD Divergences using the MACD line or Appel’s Histogram
• MACD Histogram Divergences using the common MACDH 

The scheduled update times are:

Weekly MACD and MACDH Divergences: once a week, calculated on each Friday close and posted no later than Monday evening

Daily MACD and MACDH Divergences: twice a week:

• calculated on each Friday close and posted no later than Monday evening
• calculated on each Wednesday close and posted no later than Thursday evening

Trend Analysis is provided on each stock symbol by affiliate partner INO.com, giving you complimentary technical analysis briefings using entirely different criteria.   Trend Analysis uses trend following techniques while MACD Divergences are a reversal technique.    You can consider both for a more balanced view of each market.   To get the Trend Analysis, click the symbol on the Signals page list – it costs you nothing and and no payment info will ever be requested.

Check out the Signals pages today:

• MACD Divs Daily
• MACD Divs Weekly
• MACDH Divs Daily
• MACDH Divs Weekly

Tags: INO, MACD, MACD divergence, MACD Histogram, macdh, signal

Since its not always easier keeping up with the market over a long holiday weekend, I thought to share my weekly “homework”.

Plenty of interesting red flags from my MACD Divergence Detector running on StockFinder®.   It found MACD and MACDH negative divergences on SPY, DIA, ISRG, BIDU to name a few.    Looking at the chart of SPY below, its clearly not the first negative divergence.

MACD Lines and Histogram do not confirm price action on SPY (click to enlarge)

The other SPY negative divergences kicked off a slight decline, followed by a rally.   What’s to say that won’t be the case again?

First off, consider that the markets may very well rebound again.  It is, after all, a seasonally strong time of year.  I don’t want to make recommendations or predictions here, just share some observations.  See Truth About MACD BackTesting Reports  for data on the historical back test performance of MACD divergences.

The next observation to share is that breadth and New Highs / New Lows (NH-NL) exhibit extraordinary negative divergences of their own.   Here’s a chart with McClellan’s Summation Index to show what I mean.   (Note that I didn’t personally run a back test of McClellan’s Summation Index.   Tom McClellan told me he did.  I wish the strategies of other people who have told me that had performed better in my back tests.  Anyway, until I get around to doing the back test myself, I am taking McClellan’s word that the summation index that bears his name is a useful indicator to have in the toolbox.)

Red arrows highlight divergence between SPY (green) and McClellan Summation Index (yellow)

With these kind of negative divergences showing I am certainly not thinking of buying the dip!   In fact,  negative divergences are a signal to sell long positions in my book.    

If you are also standing near the door (so to speak), or working on your own stratgy for cutting losses and taking profits, you may want to take a look at the Exit Strategies series of BackTesting Reports.   They show back test results for various kinds of fixed stop losses, trailing stops losses, and profit targets.    That stuff isn’t as glamorous as buy signals but if you didn’t make a solid plan for when to sell before you bought, the next best time to think about these things is while the market is up.

Tags: breadth divergence, exit strategies, MACD, MACD divergence, macdh, sell, selling, strategy

Do you use the MACD indicator or MACD Histogram?
Or follow an expert who does?

If you answered “yes”, you may be leaving money on the table without even knowing it. The most recent BackTestingReport uncovered two mistakes that even experts make with the MACD and MACD Histogram.

After independently researching the report, I sent it to the inventor of MACD, Gerald Appel. Here’s what he said:

“You do seem to have come pretty much to the same conclusions that our research staff has. Most of what you see regarding MACD was arrived at before 1990 by which time I was already advising audiences not to await crossings.”

Mr. Appel is the president of Signalert with hundreds of millions in assets under management, and he has a research staff. If you don’t have quite those resources – or even if you do – you might consider a small investment in an easy-to-read research report.

When you read the MACD Buy Signals Report, you will get an idea how much it cost US stock market participants who waited for MACD lines to cross before buying a stock. Not only that, you will be clued in to a second costly mistake, this time with the MACD Histogram. This one is so widespread, you’ll run into it even on Yahoo Finance charts.

Finally, you get critical data to decide how best to use MACD for your own gain.

Click here to order your report today

Tags: backtesting report, indicator, linkedin, MACD, MACD Histogram, macdh

Price and Other Indicators

An Indicator is an abstraction of historical price data which is used to gain insight into the stock or market behavior.   Examples of popular technical indicators are Moving Averages, Bollinger Bands, MACD lines and histogram, RSI, Stochastic Oscillator.

Stockcharts.com has a good comprehensive definition of technical indicators.

Extra Insight:

Indicators describe past market action in a way that can be calculated by computer.   We can objectively define trading signals in terms of the indicators.  For example, we could define a buy signal as the stock price increasing above a moving average.

Its also possible to use indicators subjectively, but that greatly diminishes their value (IMHO).

Backtesting checks market action subsequent to an indicator’s signal.  Backtesting a large number of stocks over a large time period gives insight into how the indicator performed in the past.   Backtesting can only be done with objective rules for evaluating an indicator.

Even an indicator that tested well in the past may not perform well in the future — there are no guarantees.

An objectively defined indicator can help a trader make crisp decisions and trade by a system of rules rather than be ruled by emotion.

Updated: 11/12/08.

Tags: backtesting, data, indicator, macdh, rsi, stochastic, system, technical, trading

My trading strategies follow this Naming Convention:

[Direction]_Entry_TestPeriod_[Dataset]_Exit

where:

• Direction is either L for buying long or S for selling short.   Direction is optional and if missing defaults to L.
• Entry indicates the entry strategy used.
• TestPeriod is the abbreviated years of the test data.   The data runs from May to April.  So 0407 means May 1, 2004 to April 30, 2007.
• Dataset indicates the data vendor.   It is optional and defaults to CSI Data if not used.
• Exit indicates the exit strategy used.

If one of the above field’s parameters are varied during the test, the exact settings for the run are shown next to it.   If settings are not given, then the commonly used settings apply.

For example, L_All_9404_CSI_Timed_200day

• Trades Long (enters by buying stock)
• Enter always
• Spans the time period  May 1, 1994 – April 30, 2004
• Runs on CSI Data
• Exits on a specific time setting of 200 days

Another example, MACDH_0407_ATR3

• Trades Long (enters by buying stock)
• Enter when MACDH ticks up, settings 12, 26, 9
• Spans the time period  May 1, 2004 – April 30, 2007
• Runs on CSI Data
• Exits on a trailing ATR stop of 3

Updated 11/12/08.

Tags: ATR, backtesting, data, exit, indicator, long, macdh, stop, strategy, trading

I start this blog while immersed in the early phases of my fourth major US stock market backtesting effort. 

The purpose of the blog is to record my key decisions and tactics for backtesting.   I intend it to be a resource for traders and active investors . I hope that others will learn from my efforts and we all learn from each others’ comments and discussion.

My goals for backtesting are:

1. Design trading strategies for my own use.   Specifically, 

• US Stock Market
• both buying long and short selling 
• investigate both trend following and band trading  
• swing trading: end-of-day (EOD) or daily charts and trades that last several weeks  

2. Provide information that other traders can use to develop their own systems.    That includes the areas above, and in addition, I want to illustrate for new traders such key concepts as:

• stop loss orders 
• market orders vs limit orders vs stop entry orders
• trailing stops
• price targets
• indicators like moving average, RSI, MACDH, Stochastic

3. Do this with a scope and scale that goes beyond the resources typically available to private traders, including:

• delisted stocks
• over 15 years of historical data
• clean database
• multiple time periods to avoid curve fitting
• crude and robust strategies only…limited fussing with parameters
• statistically sound methodologies
• monte carlo simulations to generalize beyond the given data

 Let’s dive in!

(Backtesting Blog is an Amazon Associate.)

Tags: backtesting, data, goals, limit order, macdh, market order, rsi, stochastic, stop loss, swing trading