BY ROBERT CUMMINGS
‘There is a time to be long, a time to be short, and a time to go fishing.’ Jesse Livemore
Technical Analysis: The study of charts utilizing specific price patterns and indicators, in an attempt to understand future trends or directions of a specific stock.
A chart, utilizing Technical Analysis, is a visual tool designed to tell you what other traders are doing, depicted as an upward or downward movement of the price and volume. These movements are representing the FEAR AND GREED OF OTHER TRADERS. The 4MACD “SYSTEM” has been designed to graphically display other traders' activity, with the goal of improving the user's probability of making a higher percent of profitable trades on a consistent basis. To master this system, one will need to look at the patterns given (in relation to any specific stock), in numerous time frames. This system is stock specific-match the stock to the pattern, analyze what you see, make a decision based on that which is shown. It is also time specific-match the time frame -4 day to 1 min time bars. Remember, don’t force the trade.
The FOUR MACD System introduces the very simple COMBINING OF 4 MACDs into a single indicator-i.e. to be interrupted as a single indicator in one window. It is designed to show current movements as a positive and negative image, (green, yellow, or red blue) and MUST be used in conjunction with Bollinger Bands, Price, Moving Averages, Money Stream, Time Segmented Volume (a better On Balance Volume improvement by Don Warden), Stochastics and Wilder’s Relative Strength Indicator. It has a contrarian indicator built into the system-the RED/BLUE COLUMN. The 4MACD are entered in a specific order for the purpose of producing a graphic image allowing for easier visualization of the changes that are occurring in the moving averages that predict direction of price movement. This system was originally designed for the INTRADAY and SWING traders with a desire to trade either LONG or SHORT. Although designed for the intraday and swing trader, the long-term investor will also find it useful.
The visual effect is obtained by switching the order of entry values in the MACD. For the negative red blue bars, the fast average is larger than the long average-opposite of how you normally would enter the values in a MACD. The green and yellow bars are entered as you normally would-a short fast which is a smaller number than the slow long number.
The chart is congested with all the indicators. Set up 2 tabs and substitute the Wilder Relative Strength for the TSV printed over the MACD window to relive some of the congestion. To further help you to understand this concept, enter each indicator one at a time and review its response to price change in several time frames-9-day to 1 minute. I would strongly suggest you enter the following settings before reading the rest of this paper. It will make it much easier to follow the commentary that follows.
Settings:
Top window:
Candlestick price chart: zoom
10 MA (Blue, wide), Exp
20 MA (Red, wide), Exp
BOLLINGER BANDS, (Magenta, wide), 7/21
Money Stream (Yellow)Middle window:
MACD, (Blue) Exp, 17/14/7, Histogram Wide
MACD, (Red), Exp, 17/8/5, Histogram Wide
MACD (Yellow) Exp10/16//5 Histogram Wide
MACD, (Green), Exp, 510/5, Histogram
TSV (White), Exp, 14, 3 MA of the TSV, (Blue), Exp, 3 day Both wide lines.
WRSI 6/3 (White) with a 3 MA Exp. (Magenta)
Bottom window:
Stochastics,
Period, 17
SK, (Cyan), 3
SD, (Red), 3
These setting are not holy--minor adjustments can be made to match your trading style.
Discussion:
The MACD Histogram negative concept, depicts the negative forces working against the price. It is graphically shown as the red/blue columns on the chart. Combining this with the positive green and yellow, the 4 MACD HISTOGRAM become the centerpiece of a trading “system”. MACD should not be used in a vacuum. Look at all the indicators in Sync. The yellow and blue act as alerts of change in direction of the moving averages and this in turn is reflected in the movement of the stock price.
The MACD values are staggered so that price changes will be detected in the green bar (the fast MACD moving average} exposing yellow (slow moving average of MACD) and the same for the negative red and blue column. It can be said that the green is bullish indicator and the red is bearish indicator.
As an illustration: think of a traffic light with 4 colored lights. This stoplight has the usual green light with a yellow caution and the red has a blue caution light. Use this as a graphic aid in the interpretation of a chart. Visualize this multi-colored MACD, (shown in the middle window), as you would a traffic light while driving down a street. Do you see a green, yellow or red light? Dependent on the color of the light, do you start changing the momentum, (speed of movement), of your car, whether accelerating or slowing down? What are the other cars, (indicators), around you doing? Are they stopping or speeding up. Are they starting to move into your path, possibly causing you to slow down or stop unexpectedly? (Red MACD and Blue bars). The experiencing of an unexpected gap up or down in price can be compared to a car hitting you that has run a red light, unexpected and unable to predict.
Think of going short as driving the wrong way on a One Way Street. You know you can make it, and benefit from your change in direction, if the traffic moving in the opposite direction has currently stopped because of a red light. When the light changes, and the traffic once again starts moving, it would then benefit you to once again turn and move with the flow of traffic.
The difference between this example of a street light and that of a changing MACD is that at a glance with the MACD you can see all facets of the current condition or that of a coming change. You can see the direction of the current momentum. You can see the initiation of a change; you can then see that change occur as the price and momentum move in an opposite direction.
The price on the MACD, relative to the centerline, seems to flow in the direction of the green bars. If the Green bars are shortening but moving from below the centerline in an upward movement, the price should soon follow. If the Green bars are above the centerline but shortening and moving down; again the price should soon follow. The yellow tip depicts the change of momentum, or, a need to use caution, before it actually occurs (divergence).
When there is divergence of the price from the MACD, IT IS IMPORTANT TO LOOK TO THE OTHER INDICATORS FOR GUIDANCE. WHERE IS THE PRICE RELATIVE TO THE BOLLINGER BANDS, IS THE STOCHASTICS FLAT OR TUNING IN THE DIRECTION OF PRICE AND ACROSS THE 20, 80 LINES, IS THE TSV CROSSING, WHERE IS PRICE RELATIVE TO THE MOVING AVERAGES? CONFIRMATION, CONFIRMATION AND MORE CONFIRMATION. For example, if the price is in divergence to the MACD indicator, the Stochastic will remain flat above or below the 20/80 line.
Look at the chart in several time frames, starting at the weekly and moving down to the one minute. This should allow you to get a feeling for the trend. You should find this exercise helpful. BASED ON YOUR TRADING PERSONALITY, be it day trader, swing trader or long term investor; pick the time frame that is best for you and the stock.
SWING TRADERS--LOOK AT THE 1-HOUR and 30 MIN. CHARTS FOR CLEAN ENTRY AND EXIT POINTS. YOU WILL FIND IT MUCH BETTER THAN END OF DAY CHARTS IN MANY INSTANCES.
For intraday trades, I personally use the 15 AND 10 minute time frames to find and follow the stock but switch to 1 minute when entering or exiting the trade for the best price. I also use the 30 min and 1 hour in some low volume stocks. Some stocks will trade better in different time frames. Find the one that you are comfortable with. Remember, each stock has its own “time frame personality.” When understood, this time frame personality, whether yours or that of the stock, will help promote more successful trades.
This analogy may seem corny but it helps to let the colors “talk”
to me. It provides for better timing, whether entering or exiting the
trade. This method allows one to get in earlier as well as stay in longer for
more profits. It will also keep you out of some BAD trades.
An example given by another reader states:
Think of the 4MACD as a traffic light with 4 lenses, in a line along your axis of sight, (green in front and red at the rear). These lenses all rotate at different speeds, perpendicular to your line of sight. Each lens has a colored half and a clear half so that its effect is only seen above or below the axis of rotation at any one time. Unlike an ordinary traffic light, which changes suddenly, this one changes continuously and gradually. You can sense coming changes by the increasing and decreasing amount of light visible above or below the axis of rotation.
There is an incredible amount of information and knowledge to be derived from reading the WORDEN NOTES, daily. This is an accumulation of many peoples’ desire to achieve the same goal but using a different way and means to get there.
I encourage you to experiment with different settings when using the FOUR MACD Method. Plot the MACDs as a line chart and see how it reacts to the price change in different time frames. Using another tab overlay Money Stream in the price top window for another perspective. Combine the 4 MACD with your other indicators for greater insight. This exercise will improve your ability to “see” that which the chart is telling you.
The Trade Setup:
There are three entry/exit points for a trade, the “Extremes”(oversold and overbought) position of the MACD and that of a “compression switch.”(Crossover).
The Ideal Setup is when the columns are at their “longest” point, either above or below the midline (0) or when the green flips up above or below the 0 midline, the price is at the top or bottom of the Bollinger Band, the TSV is crossing its average, preferably at the midline (0), but not necessarily required for a profitable trade, and the Stochastics’ moving average should be crossing up above the 20 or moving down across the 80. The WRSI will be crossing the midline on the MACD BAR at or close to the price reversal.
The exit is just the reverse of the entry setup.
The above 30 minute chart of QLGC has almost everything you will see in a chart -gaps, short trades, and the long trade. . This is just an example of the color patterns you will see and how the other indicators work to confirm the trade.
Notice how the WRSI white line crosses the midline on the bar of the MACD, the TSV moving in the direction of the price, Stochastics crossing and moving above or below the 20/80 line, and the Money Stream changing where there is price reversal. Conformation, conformation, and more conformation.
For Swing traders:
For high probability trades, look for stocks where the Stochastic has remain
flat above the 80 or below the 20 line for several days and then crosses the
line. Look at the MACD to see if it is in an overbought or oversold (Max or
“extreme” column) and the TSV is crossing its average (is extra strong
if moving across the 0 line), and the WRSI will be approaching or crossing the
midline. You can expect a 2-10 day price move up or down. Check it out on about
40 charts to learn the other indicators in Sync.
ZOOMING and The HIDDEN TRADES:
One weakness of all indicators is they will adjust as more data is collected. With the 4 MACD this is seen in the chart with the magnitude of the bars. This is important because the success of using the ‘system’ is to trade from the maximum oversold and overbought position displayed by the columns. The bars associated with the large price movement will distort columns following a price spike. Shorter bars that follow display this. For the intraday trader, this can hide very good trades. To correct for this, you can zoom in, and in some cases shorten the time frame, to display fewer bars to remove the spiking bars. Many times you will see the shorter bars become longer indicating a trade can be made.
Gaps:
Most gaps occur at opening. The MACD uses moving averages in its construction. The gap distorts the data for the first few minutes until more data is collected. There are many books written about trading in the first hour of the opening and I suggest you study this information carefully. The 4 MACD be very useful dunning this time of day. This is the only time I will watch a 1-minute chart other than to find an entry or exit price.
After enough data is collected, I will move up to the 5 min and then to the 10 min. chart. Sometime in the first 5-15 min. you will pick up a second reversal or gap filling movement. Find several stocks and look at the 1 min, 5 min, and 10 min charts for the first 30 minutes of the opening. You will be surprised to see the fast $500 you can pick up.
TXN and QLGC are good stocks to review. Sometimes you can pick up $1000-$4000 in a day in these stocks with the 4 MACD.
Conclusion:
The 4 MACD is an excellent tool to use with your own “system”. Some of my favorite trading patterns I like to trade are the BB squeeze, the 3-5-price drop, breakouts from consolidation, filling gaps and intraday reversals.
Trade the stock that fits the pattern--DON’T FORCE THE TRADE. LOOK AT HOW THE PATTERN/TIME FRAME HAS WORKED IN THE PAST WITH THE STOCK AND IN WHAT KIND OF MARKET.
CONFIRMATION, CONFIRMATION. CONFIRMATION. WITH PATIENCE TO WAIT FOR THE TRADE TO COME TO YOU AND DON’T FORCE THE TRADE-IF YOU DON’T OBEY THIS RULE, YOU WILL BE AN INVESTOR WAITING FOR THE STOCK TO RECOVER WHICH IT MAY NOT. LOOK AT ALL THE STOCKS THAT WERE $100, $50 ETC THAT ARE NOW SELLING AT $5-20.
REMEMBER: IF THE TRADE DOES NOT GO THE WAY YOU EXPECTED--CUT YOUR LOSS BY GETTING OUT FAST.
Happy trading.
Robert Cummings
4 revision 8/12/02
TSV,
Time Segmented Volume and MoneyStream
are registered trademarks of Worden Brothers, Inc.