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

2. 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”).

3. MACD Components

4. MACD Delta: Visual Proof

5. MACD: Interpretation (a) Mathematical
Any Mathematicians here?
Any Physicists?

6. 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

7. MACD: Interpretation (b) Road-wise
Read red “Delta” line as “Speed”

8. 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

9. 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”

10. 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

11. (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.)

12. ─► “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”

13. MACD: Effects of “the Pedal”

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

15. 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.

16. MACD: Signs of Success Speed crossing zero, momentum used up
To start new trend, apply more power
How much?

17. MACD: Enter Long – How long?
Momentum used up, Will it turn?
After enough initial Push, we’re cruising.

18. MACD: Example HVN

19. 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.

20. 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)

21. 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.

22. MACD: Example BSL

23. 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!

24. MACD: The Missing Link

25. Questions
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