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Nov 11, 2006 - With a little patience, the indicator can pinpoint where the next opportunity is approaching... There are many opportunities in the markets everyday. Using simple tools and a keen eye are enough to find them. One of the these is a Moving Average Convergence Divergence (MACD ) indicator. Derived from this indicator is a technique specifically used to identify divergence between price and indicator, called MACD delta. This MACD delta is simply the difference between 2 exponential moving averages, one short-term and one long-term, plotted in a histogram with 0 as the point of equilibrium. Although the numbers plotted mark the levels, this absolute numbers are not used; it is the measurement of tops and troughs and their relationship to each other that marks the importance of its use. Common knowledge dictates that not all indicators work 100%. So goes with this indicator. However there is one test to verify what the indicator is showing is not a false signal; and that is the use of price action to confirm the signal. The MACD delta indicator may lead by warning of the impending reversal but it cannot be done without the price following in the direction of the indicator. This is the test of the price action to determine if the signal is real or not. How does one trade this divergence? Once the price action has confirmed the signal, look for the first rally, that is, the first lower high after the break of support. That rally will set up an entry. During that rally up toward the horizontal line, it is actually an act of confirming the support becoming resistance. When the bar that goes lower than the low of the previous bar’s low, that is the signal to enter a short position.
The above chart shows the breakout (crossing above the horizontal line) that confirms the signal. Immediately after the breakout (blue shaded box), the first pullback begins, which went below the horizontal line. When it turns back up with the bar closing higher than the previous bar's high, that is the long entry. Note the sequence of the price action: higher high followed by higher low, then higher high, higher low, and so on. This is typical of a bullish trend. Where to exit? Each trader has his or her own style or system to determine the exit: either by an absolute point system, percentage system, indicator signal or price action signal. Here are two alternatives: 1. For longs, when prices make lower high or lower low, this is indication the market is about to consolidate or reverse. An exit here is prudent. For short, when prices make higher high or higher low, it’s time to exit.
The blue shaded box in the above chart shows the second exit strategy: exiting from divergence signal in the opposite direction without price confirmation. With a little patience, the indicator can pinpoint where the next opportunity is approaching. Being prepared is paramount. There is one precise entry and wait for the market to play itself out fully to truly profit, raising the reward/risk ratio much higher. Using the MACD delta indicator is simple and doesn’t require much time and maintenance to profit from the market. MACD delta is available using SwingTracker software. Discuss this article in the forum. ...thanks
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Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
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by Larry Swing & Brian Tran
