MACD Divergence visible at 50 bar lookback

At the MACD Rain StockFinder webinar, a question came up about a MACD Divergence on the weekly chart of the Dow 30, as shown in the chart of the NYSE:DIA (Diamonds Trust Series ETF that represents the Dow 30). Click chart to see larger view.

The price and MACD indicator action lately on the weekly meets the basic criteria for a MACD divergence: the price is reaching a higher high while the MACD is tracing out a lower high.  During the webinar, the BackTesting Report MACD Divergence scanner for StockFinder did not mark that DIA weekly negative divergence on the default chart because price makes a higher high within 100 bars – the default lookback period.   But when the lookback period (user input DivSpan) is set to 50, the MACD Divergence on the weekly chart of DIA is marked in red.  See the chart at top.

The choice of 100 for the default lookback period was arbitrary.   Its the value used for the BackTesting Reports.  Other values were not tested.

Given that many stocks have similar price patterns of a higher high in 2008, to get a comprehensive view of all the negative divergences on weekly charts, one needs a shorter lookback period at least until Oct 2010.

Tags: MACD, Stockfinder

Join me and Michael Thompson of Worden Brothers for an educational webinar about the MACD.   I use the new MACD Rain chart to step through the MACD signals in order of their appearance in a stock market rally and eventual decline.   Market analysis follows with a look at MACD divergence on a selection of ETFs.

Watch the webinar archive

Download the free MACD Rain StockFinder chart by filling out the form below.   You’ll first be sent an email to confirm that you want to receive information from BackTesting Report.   Once you confirm your request, you receive the chart by email.   You will also receive other information from BackTesting Report.   We do not share our email list and you can opt out any time.    Please enter your name and email below to recieve the free chart.

Purchase the BackTesting Report MACD Divergence RealCode scans for StockFinder

Tags: MACD, Stockfinder

In a previous post, I lamented the way StockFinder by default gives a non-standard plot of the MACD indicator and the MACD Histogram.  To fix it, you need to do two things.   The first is to set all the moving averages, even within the MACD, to Exponential.  That’s quick and easy.    The second is to get the MACD lines and the MACD Histogram aligned in one pane.  That is a little trickier.

This article explains how to get both MACD lines and histogram plotted in a pane with the same zero axis.   The steps are:

1. Select the MACD as shown (click for bigger image)

2. Right-click to bring up menu as shown  (click for bigger image)

3.  Select “Edit Plot” on the StockFinder dialog box (click for bigger image)

4.  Center  (click for bigger image)

5. Repeat for MACD histogram indicator in same StockFinder pane

While you are in there, don’t forget to change the default Moving Average types in the MACDH plot from Simple to Exponential.   See the Stockfinder’s Quirky MACD post  for more info.

Or you can just use the BackTesting Report add-in software for StockFinder , newly updated to plot the zero lines correctly.

Tags: exponential moving average, MACD, Stockfinder

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

Before starting the current round of major backtesting, I evaluated several tools to decide which to use.    This article shares the highlights of that endeavor and the main reasons for the outcome.

TradeStation was my incumbent.  By 2007 when I made my last evaluation, I’d had a couple years of experience with it as a charting tool and a backtesting engine.    I’d also used TradeStation Radarscreen to scan the market for opportunities, but found it awkward and slow.   The backtesting had proved reliable but limited to running one stock at a time.     Then TradeStation came out with two critical enhancements:  a means to read in outside data for historical prices, and hooks to automatically process more than one stock per run.

Another favorite tool is Telechartwhich has been my top-down market analysis tool since 2005.    It doesn’t have a backtesting engine.   However, in early 2007 the Worden Bros who make Telechart had just come out with the Blocks Backscanner.    I tried it out extensively and really liked the super support as well as the flexibility.   Its strength is scanning through a huge list of stocks in incredibly fast run time.    But as a very young tool, it didn’t yet have all the features I wanted like independent data sources.  Plus, it was so new  in 2007 that I often felt like a beta tester which is exciting but not what I was looking for to prove out trading strategies.    

I didn’t get past reading the specs on other backtesting tools.    Trading Blox seemed to locked into their own strategies, plus a very high price tag.  I’d previously been exposed MetaStock, struggled with it back in 2004, and was not keen on revisiting it.   I had heard good things about Wealth-Lab but didn’t want to get locked into Fidelity, and didn’t see all the features I wanted there either.

So basically my choice came down to the new Blocks or my old standby TradeStation.   I came to the conclusion that the optimal way to proceed was to rely on each tool’s strengths.    So I use TradeStation for backtesting because I can set up the large-scale, controlled software environment for it.   This gives me a way to prove out a strategy which I do only once per strategy.

Once a strategy is proven and I’m ready to trade it, I usually want to scan the market for opportunities to apply it.   I do this daily, after the market closes, using Blocks 2.0 because it is so very fast at scanning the market.

I recently attended a class on Worden Stockfinder 4.0.  It looks promising –  the Blocks program grown up and renamed.  I’ll review my impressions in another post.

(Backtestingblog is a Worden affiliate, meaning I may be compensated if you buy their product.  Blocks, Stockfinder, Telechart are trademarks of Worden Brothers Inc.   TradeStation is a trademark of TradeStation. TradingBlox is a trademark of Trading Blox. Wealth-Lab is a trademark of Fidelity. MetaStock is a trademark of Equis.)

Tags: backtesting, data, Stockfinder, strategy, Telechart, TradeStation, trading, worden