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This is my favourite indicator. It is perhaps the only indicator you need to use to trade profitably. Although I have used a commodities futures example here to illustrate the power of this indicator, MACD can be successfully used for all markets.
The moving average convergence/divergence (MACD) is a momentum oscillator developed by Gerald Appel in the early 1970s. Fluctuations in prices are reflected in MACD; if there is a sudden increase in price, the MACD will move upward. It fluctuates above and below a neutral 0.00 zone, which is why it is called an oscillator. The 0.00 zone is the horizontal equilibrium line. If MACD is above the zero line, it is bullish. If it is below the zero line, it is bearish.
FIGURE: May 2002 Soybean Oil - MACD passing through the zero line successfully anticipates the beginning of a strong trend. The crossing of the fast line (in blue) above the signal line (red) is a buy signal. The MACD does what its name implies: it measures the divergence, or convergence, of a shorter moving average with a longer one.
The blue line, which is the MACD "fast" line, reflects the difference between two exponential moving averages (EMA). In the figure above, you see the 12- and 26-period EMA, which are commonly used. The red line, or signal line, is the EMA of the MACD fast line. To calculate the signal line, the nine-period EMA was used in the above example. Again, it is commonly used.
In the chart above, you will notice a phenomenon called "divergence". You can see that the blue line formed a higher low at the spot above "Feb" than it did at the spot above "02" - all the while price was still trending down. This is called "divergence," and is another powerful use of the MACD indicator.
You can clearly see three "BUY" signals that MACD threw off in the above chart. The first was divergence. The second was when the blue line cut up through the red line just past the "Feb" point. And, the third was when the blue line cut up through the neutral 0.00 line. It doesn't get much better than this.
A position should be entered into only when a tradable has started a reliable trend (i.e., a series of higher highs and higher lows – an uptrend – or a series of lower highs and lower lows – a downtrend). You then ride that trend until clear and convincing evidence suggests that it has ended. One observation might be a pattern of higher highs and higher lows beginning to give way, suggesting the end of an uptrend.
In the above example, you should be able to spot the uptrend - the series of higher highs and higher lows - during the month of February.
It is no coincidence that, at the beginning of February in the above chart, the commercial traders were extremely long with their futures positions, as reflected by commitments of traders data. The "Big Dogs" broke the downtrend, and then started the uptrend. In the process, they caused a "short squeeze." This occurs when there is heavy short selling, and then suddenly there is a pop-up. The word squeeze comes into play because that is your blood being squeezed out of your eyeballs as you lose big time every time your short-sold tradable goes up against you.
Discover the power of the "Big Dogs" by clicking here.
So, there you have it sports fans. We actually have five "BUY" signals "ALL" pointing to a bullish trend for Bean Oil: the three mentioned above issued by MACD, the higher highs and higher lows, and commitments of traders.
Well, no, there are actually two more: There is the "Bowtie" effect, which is explained when you buy my book. There is also the fact the price is above the 30-day moving average towards the end of February, which you can't see because I didn't plot it.
That's seven all together. And, I am sure there are more, had we plotted more indicators. But, I think we have enough to go on, wouldn't you agree?
And, if that's not enough, for all you Tom Demark fans out there, I am sure you recognize the magnitude four upward trend line that's in place.
I hate to say see I told you so, but Bean Oil hit 17.19 March 15th, 2002, which was the end of this particular rally. The chart above doesn't reflect March's price activity because I created this page in February, and was forecasting a rise in this market. I am writing this commentary in this paragraph March 22nd, 2002. Do you believe me now?
MACD can be used to analyze crossovers, divergences, and overbought/oversold conditions. It is helpful in determining the price direction of a tradable, and, if used correctly, it will benefit a you in several ways.
One way is to observe when MACD issues a sell signal from quite overbought levels. Easing overbought pressures requires MACD to pull back to its neutral 0.00 zone. This requires either a lengthy sideways consolidation and/or a significant correction.
Important point ... I must point out that trading is not an accounting-perfect business. It is a business of probabilities. Things will "probably" happen. But, there are no guarantees. I have seen it happen where MACD failed to confirm a price high. Normally, such negative divergences are followed by consolidation or corrections, but in certain instances some tradabes, like smaller cap stocks, keep climbing in spite of such divergences. In the end, price is king, and is "the ultimate indicator." Where MACD does not confirm price direction, the price trend itself should be given the benefit of the doubt.
That pretty much finishes it for MACD. However, I have included some other ideas for determining when a market is about to shift gears, and change direction. Please read on about "Swing Trade," "Classic 'Reversal' Week," and "The 4% Solution." You can certainly use MACD, in combination with any of these ideas, to improve your chances of catching fluctuations in prices correctly.
If you would like more information on MACD and the bottoming process, please send me an e-mail, and I will send you two "free" reports - "Low Hanging Fruit" and "Shearing the Sheep": email@example.com.
More on commodities investment research and commodity trading rules ...
This three-bar pattern is the one that futures traders use. It denotes a change in the direction of price. The commodity establishes a low price as a swing point. Once the commodity closes above the high of the low day, that is a change of direction for an undetermined period. For a detailed explanation of how this pattern works, please click here. It works for all markets, not just commodities futures.
CLASSIC “REVERSAL” WEEK
Record volume and a weekly close toward last week’s high is consistent with a classic “reversal” week that is found at bottoms. Another variation sees lower price spikes intraweek followed by a weekly close toward the high for the week on record volume. Either occurrence could be taken as significant evidence of a bottom.
THE 4% SOLUTION
Now, let’s have a look at “The 4% Solution” … Here, I want you to pay close attention, as this idea has taken me a long time to find, and it, for once and for all, offers a way to “prove” that a market has changed direction conclusively.
Here we go … We are talking about a “momentum-shift indicator.” It uses a shift of 4%, plus or minus 1%, in the weekly closing price as a sign of a shift in momentum. More specifically, what we are talking about is observing that the current week’s close is 3-5% higher than the week before – in the event of an upturn, or 3-5% lower for a downturn . This means that price action is “probably” reversing its course. Remember, trading is a business of “probabilities.”
The key here is that this is the first week that you have observed a roughly 4% differential between the previous week’s close and this week’s. This is a reasonable indication that momentum is changing.
“The 4% Solution” is a momentum-shift indicator that provides an early warning that a possible major market move might just be imminent.
Regarding whether “The 4% Solution” should be 3%, 4%, or 5%, there is no magic here. Both 3% and 5% will do the trick, although the lower number would increase the number of signals, and the higher number would decrease the number. More volatile tradables tend to outperform less volatile ones.
Sound familiar? You have spent years surfing the 'Net, and studying books and charts in search of commodity trading rules, a currency trading strategy, or stock market successful trading strategies. All you really want is the 'Holy Grail' of entry techniques. You usually end up adding one indicator on top of another, switching from one guru to the next, until you are so confused and unsure of your entry system that you are unable to make entry decisions and stay organized. You get so distracted and frustrated that you quit watching the markets all together!
Shows you how FAST you can make money when the BIG DOGS make their move - by shamelessly copying this winning group . Even I am STILL surprised by how much power they have over ALL markets - not just commodities futures, currencies, and stocks.
When it comes to commodity trading rules, a currency trading strategy, or stock market successful trading strategies, you will find a whole lot more in my internationally acclaimed book ...
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