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© 2004 by Rettmer Trading Trust Some Aspects of the MACD Indicator Udo Stegen © 2004 by Rettmer Trading Trust

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MACD Aspects u Moving u Average (always Exponential MA) u Convergence and u Divergence MACD measures the distance between two EMAs and graphs their relationship, as the two lines move closer together (converge) and further apart (diverge).

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© 2004 by Rettmer Trading Trust MACD Components

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© 2004 by Rettmer Trading Trust MACD Delta: Visual Proof

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© 2004 by Rettmer Trading Trust MACD: Interpretation (a) Mathematical Any Mathematicians here? Any Physicists?

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© 2004 by Rettmer Trading Trust MACD: Interpretation (a) Mathematical dP/dt = v first derivative of travelled distance over time is velocity dv/dt = a first derivative of velocity is acceleration

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© 2004 by Rettmer Trading Trust MACD: Interpretation (b) Road-wise Read red Delta line as Speed

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© 2004 by Rettmer Trading Trust MACD: Interpretation (b) Road-wise Read red Delta line as Speed at which the Price changes faster or slower than average Positive : drive forward – price rises above average; Negative: slow down/ reverse – price falls below average

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© 2004 by Rettmer Trading Trust MACD: Interpretation (b) Road-wise Read red Delta line as Speed at which the Price changes faster or slower than average Positive : drive forward – price rises above average; Negative: slow down/ reverse – price falls below average Yellow Histogram is Acceleration

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© 2004 by Rettmer Trading Trust MACD: Interpretation (b) Road-wise Read red Delta line as Speed at which the Price changes faster or slower than average Positive : drive forward – price rises above average; Negative: slow down/ reverse – price falls below average Yellow Histogram is Acceleration at which the Speed changes faster or slower than average Positive : accelerate – increase the speed Negative: hit the brakes – slow down

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© 2004 by Rettmer Trading Trust MACD: the Accelerator Q: What comes first: Acceleration or Speed? (Hint: Ignore friction; just roll along in Neutral.)

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© 2004 by Rettmer Trading Trust MACD: the Accelerator Q: What comes first: Acceleration or Speed? A: Neutral means cruising at average speed. To change, someone must step on a pedal. Mr Market, the Chauffeur Mr Market, the Chauffeur

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© 2004 by Rettmer Trading Trust MACD: Effects of the Pedal

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© 2004 by Rettmer Trading Trust MACD: Divergence Conditions causing Divergence u Sustained Trend u Purposeful and Effective Use of Pedals u Sufficient to reverse effects of Inertia

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© 2004 by Rettmer Trading Trust MACD: Signs of Success u Action equals Reaction To neutralise the effects of acceleration over time, we must apply the same amount of braking power over time. u … and then some more To reverse the trend, we must then apply more power in the new (opposite) direction.

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© 2004 by Rettmer Trading Trust MACD: Signs of Success u Speed crossing zero, momentum used up u To start new trend, apply more power u How much?

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© 2004 by Rettmer Trading Trust MACD: Enter Long – How long? u Momentum used up, Will it turn? u After enough initial Push, were cruising.

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© 2004 by Rettmer Trading Trust MACD: Example HVN

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© 2004 by Rettmer Trading Trust MACD: Divergence u Divergence lines follow Trendline Rules – Falling = Resistance – Rising = Support – Comparable Turning Points Start: Determine a new trend in MACD (Delta or Histogram). If corresponding Price trend diverges, we have Divergence.

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© 2004 by Rettmer Trading Trust MACD: Entry Rules u Establish Divergence Interval u Longest Histogram Bar sets Trigger (Draw auto-extending Horizontal trendline) u Enter on break of Trigger line – OR - u Wait for Delta Line to cross Zero (depending on duration of prior trend)

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© 2004 by Rettmer Trading Trust MACD: Exit Rules u Days 1 to 4 after entry: Be aware of potential false break. u Stop-loss quickly u While Speed stays on side of trade: Stay u When Speed crosses Zero: Exit u Or apply any Exit Rule from your Plan.

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© 2004 by Rettmer Trading Trust MACD: Example BSL

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© 2004 by Rettmer Trading Trust MACD: Rules Modified u Divergence lines follow Trendline Rules u Longest Histogram Bar sets Trigger u Invalidated when – Delta line crosses trendline extension – Price line ceases to diverge …but… Do Not Ignore the Volume!

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© 2004 by Rettmer Trading Trust MACD: The Missing Link

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© 2004 by Rettmer Trading Trust Questions ???

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