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**Some Aspects of the MACD Indicator**

Udo Stegen © 2004 by Rettmer Trading Trust

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**MACD Aspects Moving Average (always Exponential MA) Convergence and**

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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MACD Components

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**MACD Delta: Visual Proof**

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**MACD: Interpretation (a) Mathematical**

Any Mathematicians here? Any Physicists?

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**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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**MACD: Interpretation (b) Road-wise**

Read red “Delta” line as “Speed”

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**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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**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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**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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**(Hint: Ignore friction; just roll along in Neutral.)**

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

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**─► “Mr Market, the Chauffeur”**

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”

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**MACD: Effects of “the Pedal”**

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**Conditions causing Divergence**

MACD: Divergence Conditions causing Divergence Sustained Trend Purposeful and Effective Use of Pedals Sufficient to reverse effects of Inertia

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

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**MACD: Signs of Success Speed crossing zero, momentum used up**

To start new trend, apply more power How much?

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**MACD: Enter Long – How long?**

Momentum used up, Will it turn? After enough initial Push, we’re cruising.

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MACD: Example HVN

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**MACD: Divergence 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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**MACD: Entry Rules Establish Divergence Interval**

Longest Histogram Bar sets Trigger (Draw auto-extending Horizontal trendline) Enter on break of Trigger line – OR - Wait for Delta Line to cross Zero (depending on duration of prior trend)

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

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MACD: Example BSL

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**Do Not Ignore the Volume!**

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

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MACD: The Missing Link

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Questions ???

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