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Posts tagged ‘Day Trading’

Next Danger: “Splash Crash”

By JIM MCTAGUE 

Last year’s Flash Crash was a hair-raising experience for stock and commodities investors—comparable to the sudden descent of a large airliner from 38,000 feet to tree-top level, followed by an equally sudden and steep ascent.

A trillion dollars in equity vanished in minutes, as stock futures, exchange-traded funds and equities plunged. I’ve recently heard from a computer-trading expert warning of the very real possibility of a more widespread and catastrophic “splash crash,” a dislocation by high-speed trading computers that could simultaneously splash across many more asset classes and markets. Imagine our metaphorical jet buried in the earth up to its tail.

The possibility of a splash-crash nightmare springs from John Bates, the affable chief technology officer of Progress Software (ticker: PRGS), a $1.89 billion company whose worldwide headquarters is in Bedford, Mass. Bates has an impressive résumé, including a doctorate in computer science from Cambridge University. He’s also a member of a panel of technology experts that advises the Commodities Futures Trading Commission.

“I think there is an extreme risk of seeing this because we’re not serious about putting measures in place to police against it,” says Bates, who freely acknowledges that his company has computer programs that it would like to sell to securities and commodities regulators to address this very issue.

HIGH-SPEED COMPUTERS TRADING millions of times a day on multiple exchanges around the globe have in effect linked once-disparate markets into an unstable, volatile whole. The nimble robotic brains are instructed by their masters to buy and sell stocks at the speed of light without human intervention. Packed full of pattern-recognition software and other advanced programs, these artificial-intelligence systems base their trading decisions on factors such as market volume, momentum and direction, and the historic pricing relationships between various stocks and asset classes.

Some of the programs even react to breaking news stories, translated for their consumption into algorithms by companies including Dow Jones, the parent of Barron’s, and Reuters. Each second, these talented robots monitor dozens of pricing relationships for multiple securities and commodities on many exchanges and buy or sell whenever an arbitrage opportunity arises. Many of the machines are plugged right into the exchanges’ computers to give them an extra speed advantage. They need it. Some of these opportunities are so fleeting—we’re talking milliseconds—that they are invisible to us mere mortals.

The machines typically hold the stocks from two to seven seconds, realize a portion-of-a-penny profit, and repeat the process, over and over. The pennies accumulate into astronomically large heaps. Estimates of the unregulated, secretive industry’s profits for 2009 ranged from $2 billion to $5.6 billion.

Oversight of robotic trading is so slight that regulators have little idea of itsimpact. Progress Software’s Bates frets that, absent more oversight, terrorists wielding the smart machines could attack the markets in an attempt to cripple our economy. Regulators counter that it would be much more difficult for hackers to infiltrate a stock exchange than, say, a company like Sony (SNE), the recent victim of a crippling criminal cyber attack. But it isn’t impossible. Imagine an agent working for a foreign government infiltrating a firm that owns robots and infecting one or more of the machines with a malicious virus.

“You almost need something like a Norad [the joint U.S.-Canadian North American Aerospace Defense Command]… for the markets,” Bates says. Because some 15% of the U.S. economy is based on financial services and the markets, they should be protected on the basis of national security, he asserts. This is arguable. Other experts opine that the Securities and Exchange Commission is more lacking in manpower than technology and that it could stay fairly on top of the market with a hundred more mathematicians, as opposed to a billion-dollar supercomputer.

Often, the robots or their handlers blunder and, consequently, individual stock prices go haywire. Regulators have tried to dampen the effect with “circuit breakers” on the most popular stocks and ETFs—a trigger that halts trading when a stock’s price swings up or down by 10% within any five-minute period. Even so, there are several bizarre trading events every week. For example, last Wednesday, May 18, the Class C preferred shares of Strategic Hotels & Resorts (BEEPRC) rose to $2,600 from $28.32 in just 11 seconds, according to Eric Hunsader of Nanex, a market-data provider from Winnetka, Ill. Then, they reverted to their previous price.

There’s also circumstantial evidence that some of the robots are mechanized Ivan Boeskys, attempting to manipulate prices. “Everybody knows it,” says Bates. “The regulators know it. So do the exchanges. They should begin actively policing trading.”

This might not be easy. Some of the “crimes” might be the result of simple operator error or the unintended consequences of technological complexity. Regulators and the Justice Department are employing pattern-recognition software in an attempt to differentiate deliberate acts from innocent mistakes.

“POLICING REQUIRES YOU TO ACTUALLY sit within the stream of data as it is being generated,” Bates adds. “That way the regulators can catch the malicious machines in the act and stop them before they can impact the markets.” The SEC, in conjunction with the Justice Department, is conducting a more traditional investigation, poring over historical market data to detect patterns of criminal behavior.

Bates isn’t a lone voice. Other market experts agree that a bigger flash crash is possible. Joe Saluzzi of Themis Trading in Chatham, N.J., warns that fixes like the circuit breakers are Band-Aids: “Even if regulators had their 10% limit-up/limit-down circuit breakers in place for all stocks, the market could still drop 10% in a matter of seconds or minutes. This will shatter already-fragile investor confidence.”

I’m shattered already. 

source: http://online.barrons.com/article/SB50001424052970203869804576327391603772726.html?mod=BOL_hpp_dc

Comment:

If you are thinking of dipping your toe into the markets the above article should be a warning to you

It is a very stressful type of job (as can been seen on video clip below) and often brings you to the brink, especially when the market turns and you are not prepared for it as almost 90 % of traders get caught out every time !

I was wondering most articles seem to concentrate on a possible market meltdown I am curious what are the chances of a market explosion to the up side. It must be just as plausible! Do the market regulators have a trip switch in place for such an eventuality?

Broad Market Reversal

New York Stock Exchange on Wall Street in New ...

Image via Wikipedia

Broad Market Reversal

 by Chris Vermeulen

Better hold on to your hat!

This had been an exiting week for traders as the equities market was on a verge of a major sell off. Fortunately, we were watching the market very closely and saw the sentiment and market internals shift shortly after a new low was set last week. That was an early warning for us that a trend reversal to the upside could happen at any hour or day this week.

Wednesday and Thursday’s rallies were on solid volume and the market internal indicators along with market breadth were strong also. There has been a large surge of new highs across the board on the NYSE, NASDAQ and AMEX. These numbers tell me that it’s not just one sector moving the market; instead it’s a broad market advance (institutional buying).

While I don’t typically try to pick major tops or bottoms because of the added risks and lower probability of winning trades, I do tend to spot them forming a few days in advance allowing me to tighten stops and take some profits on positions.

Trend reversals typically have large violent moves near the beginning and end of their life cycle making things not only tougher to trade but potentially more costly. Once I see a trend confirmed with moving averages, volume, and sentiment along with market breadth that’s when I start looking to take positions on pauses or pullbacks to support zones. This greatly increases the odds of winning/making money from the market. There are some really great Options Trading Strategies for taking advantage of these volatility changes in the market which you can get at OptionsTradingSignals.com

SPY Daily Chart:

 

 As you can see the market has clearly broken to the upside above key moving averages after finding support at the 50 day moving average. This rally has some solid volume behind it which I like to see also.

The first 3-4 days of a trend reversal generally post some give moves but after that initial thrust expect a pause or pullback to happen.

SPY ETF Trading

SPY 60 Minute Intraday Chart:

 We were lucky enough to take profits on our inverse SP500 trade as the market started to give us mixed signals of a possible rally. A couple days later on Nov 26th we saw a major shift within the market sentiment preventing us from shorting the market again.

Two days later the broad market gapped higher triggering protective stops/short covering sparking a fierce two day rally which took the market up to a major resistance level. I do feel as though the market is going higher, but right now, everything is WAY over bought and trading at resistance. Even if the market moves higher for another 2-3 days and breaks this resistance level, it will most likely have a pause, or pullback as it regains energy for another thrust higher.

Trade SPY ETF

Mid-Week Trading Conclusion:

 In short, it looks as though the trend is now up and the Christmas rally could be gearing up for a good one!

source https://machholz.wordpress.com/wp-admin/post-new.php

Comment

Way ahead of you chris with this one

wealthbuilder.ie latest market brief

Wealthbuilder.ie

Quarterly Market Brief

1st. December 2010

Chris over at wealthbuilder.ie has sent over his latest market brief

My favourite indicator of market breath, the McClennan Summation Index, is finally beginning to get to a level where it is becoming interesting. A move into negative territory, though some ways to go, will herald the probability that stocks will soon begin providing price action that brings solid technical support. This is good news particularly for those who have been out of the market since the early September bull move. In my books patience is a major key to achieving above average investment returns. Those investors who relaxed and held off while the herd chased the trend should now begin to sharpen their attention. At the moment the Dow Transports (DJ-20) are showing more strength than the Dow Industrials (DJ-30).  However, Technology, Mid-Caps and Small Caps all remain strong despite pull-backs. This indicates that the March 2009 bull trend is still solidly in place for the moment.full PDF Doc here Nov Market brief

Market Brief

Wealthbuilder.ie

22nd. October 2010

 Getting Some Perspective

From a Dow Theory point of view this is the situation as I see it. The market is giving very strong signals particularly on the Transports side. My key break point is 5265 to give the first indication that the new Bull Run has commenced. We are currently at 4735. Near but not quite there. My key break point on the Dow Industrials is 13566. WE are currently at 11146 some 2420 points away.

 From a purely momentum perspective if the current positions on the Dow Transports and the Dow Industrials are solidly broken up through, even though the market is very overbought (based on fast and slow stochastics and the McClennan Summation index) it will very bullish short term. This situation is corroborated by price action on the NASDAQ and the S & P.

 As we are currently down the line on a fairly positive earnings season and it is understandable that when it ends there should be a correction, but if it proves to be mild it will offer an excellent buying opportunity to participate in your favourite value and momentum targets.

  Dow Transports: Weekly

 

 

Successful Day Trading Brief

My thanks to Christopher for his latest contribution

as a Trader myself I think this article is a must read and amply covers the dangerous pitfalls lurking inside every trade, a day trader makes.

 Day trading is not the answer to all your financial troubles , but with a good professional guide it could become a gateway to your own financial independence.

I have personally traded the markets now for 10 years and it is only in the last 3 years that I have begun to make money consistently and this is all down to sticking to the rules

Without effort and investment in learning, most of you will lose your money

It makes sense before you dip your toe into something you know nothing about ,you learn something about it first! 

 makes sense to do so?

 

 

Successful Day Trading Brief

Christopher M. Quigley

B.Sc., M.M.I.I. Grad., M.A.

 

Judging from the contents of an increasing number of emails more and more investors are choosing to “actively” trade the market rather than simply “buy and hold” it. In the main, this is due to the fact that in a bear market the latter strategy creates losses that are difficult to accept long term. However another reason is that with limited business opportunity available investors are seeking “income” rather than capital gain from their investments.

Accordingly I set out below some parameters to help these new “traders” avoid the worse pitfalls and hopefully guide them towards the mindset required for long term success.

(This article has some notes from earlier publications for ease of reference).

1.    Start. Markets are rational. The best theory to gain this insight is Dow Theory (see note 1). Learn everything you can about Hamilton’s and Dow’s perceptions and make it part of your investment “macro-view”.

2.    Due to the growing complexity in financial reporting and the opportunity for abuse therein, with its concomitant risk, it may be advisable to trade through exchange traded funds (ETF’) or Contracts for Difference (CFD’s). These funds trade like stocks but offer exposure to equity sectors, commodities, currencies and interest rates. Thus you have better opportunity for diversification with less risk. (If you do not understand CFD’s see note 2 below).

3.    When you enter a position know beforehand your exit point. Always place a sell stop thus limiting your potential loss.

4.    As your profits rise adjust your sell stop upwards thus locking in your profits.

5.    A trading platform offering discount commissions is absolutely vital.

6.    Technical analysis data is vital to judge your entry and exit points. Get a good system that offers “real time” streaming providing one minute, five minute, ten minute and one hour ticker readings in addition to the regular daily timelines. I prefer the five minute screen for active day trading.

7.    Using too many technical indicators creates “paralysis by analysis”. Get to know the indicators that work for you and stick to them. Consistency will bring greater reward. I like MACD (moving average convergence divergence, 10 and 20 DMA’s (daily moving averages) and purchase volume. For price I use the candlestick format rather than the simple line as it gives more information on the market psychology of actual price movement. (See note 3 below).

8.     You must adopt a trading strategy. If you do not have one find one. If you are new to trading use the many simulation packages available online to test and retest your knowledge and approach. Do not start to spend a major part of your capital until you have proven to yourself that you can consistently make good investment decisions in real time. It is better to be losing time rather than time and money. For me the best strategy to successfully day trade is a Momentum Strategy. This strategy highlights only top Growth Stocks with high Price Earnings Ratios. A good BUY indicator is a BULLISH ENGULFING candlestick moving up through a significant DMA on high volume. ideally with a MACD changing from negative to positive. A good SELL indicator is a BEARISH ENGULFING candlestick moving down through a significant DMA, ideally with MACD moving from positive to negative.

9.    The holy grail of trading is patience. If you do not have a trade that has a good

probability to work profitably for you the best place to be is in cash. This is hard to learn but is

absolutely essential.

 

10.     If you think trading is gambling you have missed the point and need to be re-educated. Go back to start and get your thinking rational.

 

Note 1:

Dow Theory

The Dow theory has been around for almost 100 years. Developed by Charles Dow and refined by William Hamilton, many of the ideas put forward by these two men have become axioms of Wall Street.

Background:

Charles Dow developed the Dow theory from his analysis of market price action in the late 19th. Century. Until his death in 1902, Dow was part owner as well as editor of the Wall Street Journal. Even though Charles Dow is credited with initiating Dow theory, it was S.A. Nelson and William Hamilton who later refined the theory into what it is today. In 1932 Robert Rhea further refined the analysis. Rhea studied and deciphered some 252 editorials through which Dow and Hamilton conveyed their thoughts on the market.

Main Assumptions:

1.    Manipulation of the primary trend as not being possible is the primary assumption of the Dow theory. Hamilton also believed that while individual stocks could be influenced it would be virtually impossible to manipulate the market as a whole.

2.    Averages discount everything. This assumption means that the markets reflect all known information. Everything there is to know is already reflected in the markets through price. Price represents the sum total of all the hopes, fears and expectations of all participants. The un-expected will occur, but usually this will affect the short-term trend. The primary trend will remain unaffected. Hamilton noted that sometimes the market would react negatively to good news. For Hamilton the reason was simple: the markets look ahead, this explains the old Wall Street axiom “buy on the rumour and sell on the news”.

Even though the Dow Theory is not meant for short-term trading, it can still add value for traders. Thus no matter what your time frame, it always helps to be able to identify the primary trend. According to Hamilton those who successfully applied the Dow Theory rarely traded on too regular a basis. Hamilton and Dow were not concerned with the risks involved in getting exact tops and bottoms. Their main concern was catching large moves. They advised the close study of the markets on a daily basis, but they also sought to minimise the effects of random movements and recommended concentration on the primary trend.    

Price Movement:

Dow and Hamilton identified three types of price movement for the Dow Jones Industrial and Rail averages:

A.    Primary movements

B.    Secondary movements

C.    Daily fluctuations

A.    Primary moves last from a few months to many years and represent the broad underlying trend of the market.

B.    Secondary or reaction movements last for a few weeks to many months and move counter to the primary trend.

C.    Daily fluctuations can move with or against the primary trend and last from a few hours to a few days, but usually not more than a week.

Primary movements, as mentioned, represent the broad underlying trend. These actions are typically referred to as BULL or BEAR trends. Bull means buying or positive trends and Bear means negative or selling trends. Once the primary trend has been identified, it will remain in effect until proven otherwise. Hamilton believed that the length and the duration of the trend were largely undeterminable. Many traders and investors get hung up on price and time targets. The reality of the situation is that nobody knows where and when the primary trend will end.

The objective of Dow Theory is to utilize what we do know, not to haphazardly guess about what we do not. Through a set of guidelines. Dow Theory enables investors to identify the primary trend and invest accordingly. Trying to predict the length and duration of the trend is an exercise in futility. Success according to Hamilton and Dow is measured by the ability to identify the primary trend and stay with it.

Secondary movements run counter to the primary trend and are reactionary in nature. In a bull market a secondary move is considered a correction. In a bear market, secondary moves are sometimes called reaction rallies. Hamilton characterized secondary moves as a necessary phenomenon to combat excessive speculation. Corrections and counter moves kept speculators in check and added a healthy dose of guess work to market movements. Because of their complexity and deceptive nature,

secondary movements require extra careful study and analysis. He discovered investors often mistake a secondary move as the beginning of a new primary trend.

Daily fluctuations, while important when viewed as a group, can be dangerous and unreliable individually. getting too caught up in the movement of one or two days can lead to hasty decisions that are based on emotion. To invest successfully it is vitally important to keep the whole picture in mind when analysing daily price movements. In general they agreed the study of daily price action can add valuable insight, but only when taken in greater context.

The Three Stages of Primary Bull Markets and Primary Bear Markets.

Hamilton identified three stages to both primary bull and primary bear markets. The stages relate as much to the psychological state of the market as to the movement of prices.

Primary Bull Market

Stage 1.    Accumulation

Hamilton noted that the first stage of a bull market was largely indistinguishable from the last reaction rally in a bear market. Pessimism, which was excessive at the end of the bear market, still reigns at the beginning of a bull market. In the first stage of a bull market, stocks begin to find a bottom and quietly firm up. After the first leg peaks and starts to head down, the bears come out proclaiming that the bear market is not over. It is at this stage that careful analysis is warranted to determine if the decline is a secondary movement. If is a secondary move, then the low forms above the previous low, a quiet period will ensue as the market firms and then an advance will begin. When the previous peak is surpassed, the beginning of the second leg and a primary bull will be confirmed.

Stage 2.    Movement With Strength

The second stage of a primary bull market is usually the longest, and sees the largest advance in prices. It is a period marked by improving business conditions and increased valuations in stocks. This is considered the easiest stage to make profit as participation is broad and the trend followers begin to participate.

Stage 3.    Excess

Marked by excess speculation and the appearance of inflationary pressures. During the third and final stage, the public is fully involved in the market, valuations are excessive and confidence is extraordinarily high.    

 

Primary Bear Market

Stage 1.    Distribution

Just as accumulation is the hallmark of the first stage of a primary bull market, distribution marks the beginning of a bear market. As the “smart money” begins to realise that business conditions are not quite as good as once thought, and thus they begin to sell stock. There is little in the headlines to indicate a bear market is at hand and general business conditions remain good. However stocks begin to lose their lustre and the decline begins to take hand. After a moderate decline, there is a reaction rally that retraces a portion of the decline. Hamilton noted that reaction rallies during a bear market were quite swift and sharp. This quick and sudden movement would invigorate the bulls to proclaim the bull market alive and well. However the reaction high of the secondary move would form and be lower than the previous high. After making a lower high, a break below the previous low, would confirm that this was the second stage of a bear market.

Stage 2.    Movement With Strength

As with the primary bull market stage two of a primary bear market provides the largest move. This is when the trend has been identified as down and business conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit margins shrink and revenues fall.

Stage 3.    Despair

At the final stage of a bear market all hope is lost and stocks are frowned upon. Valuations are low, but the selling continues as participants seek to sell no matter what. The news from corporate America is bad, the economic outlook is bleak and no buyers are to be found. The market will continue to decline until all the bad news is fully priced into the stocks. Once stocks fully reflect the worst possible outcome, the cycle begins again.

Signals:

A.    Identification Of The Trend

The first step in the identifying the primary trend is to analyse the individual trend of the Dow Jones Industrial Average and the Dow Jones Transport Average. Hamilton used peak and trough analysis to ascertain the identity of the trend. An uptrend is defined by prices that form a series of rising peaks and rising troughs [higher highs and higher lows]. In contrast, a downtrend is defined by prices that form a series of declining peaks and declining troughs [lower highs and lower lows].

Once the trend has been identified, it is assumed valid until proven otherwise. A downtrend is considered valid until a higher low forms and the ensuing advance off the higher low surpasses the previous reaction high. Conversely, an uptrend is considered in place until a lower low forms.

B.    Averages Must Confirm

Hamilton and Dow stressed that for a primary trend or sell signal to be valid, both the Dow Jones Industrial and The Transport averages must confirm each other. For example if one average records a new high or new low, then the other must soon follow for a Dow theory signal to be considered valid.

C.    Volume

Though Hamilton did analyse statistics, price action was the ultimate determinant. Volume is more important when confirming the strength of advances and can also help to identify potential reversals. Hamilton thought that volume should increase in the direction of the primary trend. For example in a primary bull market, volume should be heavier on advances than during corrections. The opposite is true in a primary bear market. Volume should increase on the declines and decrease during the reaction rallies. Thus by analysing the reaction rallies and corrections, it is possible to judge the underlying strength of the primary trend.

D.    Trading Ranges

In his commentaries over the years, Hamilton referred many times to “lines”. Lines are horizontal lines that form trading ranges. Trading ranges develop when the averages move sideways over a period of time and make it possible to draw horizontal lines connecting the tops and the bottoms. These trading ranges indicate either accumulation or distribution, but are virtually impossible to tell which until there was a clear break to the upside or the downside.

Conclusion

The goal of Dow and Hamilton was to identify the primary trend and catch the big moves up and be out of the market the rest of the time. They well understood that the market was influenced by emotion and prone to over-reaction, both up and down. With this in mind, they concentrated on identification and following the trend.

Dow theory [or set of assumptions] helps investors identify facts. It can form an excellent basis for analysis and has become the cornerstone for many professional traders in understanding market movement. Hamilton and Dow believed that success in the markets required serious study and analysis. They realised that success was a great thing, but also realised that failure, while painful, should be looked upon as learning experiences. Technical analysis is an art form and the eye and mind grow keener with practice. Study both success and failure with an eye to the future.

Note 2:

Contracts for Difference

ONE of the most innovative financial instruments that have developed over the last decade or so is the CONTRACT FOR DIFFENCE, better known as a CFD. The explosion in the use of this product is one of the reasons why London, as opposed to New York, is becoming the financial location of preference for many financial managers and hedge traders. CFD’s are not allowed in the U.S. due to legal restrictions imposed by the American Regulators.

Contracts for Difference were developed in London in the early 1990’s. The innovation is accredited to Mr. Brian Keelan and Mr. Jon Wood of UBS Warburg. They were then initially used by institutional investors and hedge funds to limit their exposure to volatility on the London Stock Exchange in a cost-effective way, for in addition to being traded on margin, they helped avoid stamp duty (a government tax on purchase and sale of securities).

A CFD is in essence a contract between two parties agreeing that the buyer will be paid by the seller the difference between the contract value of the underlying equity and its value at time of contract. This means that traders and investors can participate in the gains and losses (if shorting) of the market for a fraction of capital exposed if the equity was purchased outright. In This regard the CDS’s operate like option contracts, but unlike calls and puts, there are no fixed expiration dates and contract amounts. However contract values are normally subject to interest and commission charges. For this reason they are not really suitable to investors with a long-term buy and hold strategies. 

CFd’s allow traders to invest long or short using margin. This fixed margin is usually about 5-10% of the value of the underlying financial instrument. Once the contract is purchased there is a variable adjustment in the value of the clients account based on the “marked to market” valuation process that happens in real time when the market is open. Thus for example if a stock ABC Inc. is trading at $100 it would cost approx. $10 to trade a CFD in ABC. If 1000 units were traded

it would therefore cost the investor $10,000 to “control” $100,000 worth of stock. If the stock increased in value to $110 the “marked to market” process would add $10,000 to the client’s account (110-100 by 1000). As we can see the situation works very similarly to options but for the fact that there are no standard option contract sizes and expiration dates and complicated strike levels. Their simplicity has added greatly to their popular appeal amount the retail public.

Contracts For Difference are currently available in over the counter markets in Sweden, Spain, France, Canada, New Zealand, Australia, South Africa, Australia, Singapore, Switzerland, Italy, Germany and the United Kingdom. Their power and scope continue to grow. This development poses a problem to American financial institutions in that unless there is a change in security regulation Wall Street will lose out on a financial instrument that is changing the manner in which the greater public and aggressive financial managers are investing for the future. It is expected that Contracts for Difference will become the medium of transaction for the majority of World traders within the next decade.

Note 3:

Moving Average Convergence Divergence (MACD)

 Developed by Gerald Appel, MACD is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero.

The most popular formula for the standard MACD is the difference between a stock’s 26-day and 12-day exponential moving averages. However Appel and others have since tinkered with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter moving averages will produce a quicker, more responsive indicator, while using longer averages will produce a slower indicator.

What does MACD do?
MACD measures the difference between two moving averages. A positive MACD indicates that the 12-day EMA (exponential moving average) is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing and this would be considered bullish. If MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average is expanding. Downward momentum is accelerating and this would be considered bearish. MACD centerline crossovers occur when the faster moving average crosses the slower moving average. One of the primary benefits of MACD is that it does incorporate aspects of both momentum and trend in one indicator. As a trend following indicator, it will not be wrong for long. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security.

As a momentum indicator, MACD has the ability to foreshadow moves in the underlying stock. MACD divergences can be a key factor in predicting a trend change.  For example a negative divergence on a rising security signifies that bullish momentum is wavering and that there could be a potential change in trend from bullish to bearish. This can serve as an alert for traders and investors.

In 1986 Thomas Aspray developed the MACD histogram in order to anticipate MACD crossovers. The MACD histogram represents the difference between MACD and the 9-day EMA of MACD. The plot of this difference is presented as a histogram, making centerline crossovers and divergences more identifiable. Sharp increases in the MACD histogram indicate that MACD is rising faster than the 9-day ema and bullish momentum is strengthening. Sharp declines in the MACD histogram indicate that the MACD is falling faster that its 9-day ema and bearish momentum is increasing. Thomas Aspray recognized the MACD histogram as a tool to anticipate a moving average crossover. Divergences usually appear in the MACD histogram
before MACD moving average crossover. Armed with this knowledge, traders and investors can better prepare for potential change. Remember the weekly MACD histogram can be used to generate a long-term signal in order to establish the tradable trend, thus allowing only short-term signals that agree with the major trend to be used for investment action.

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