Jan 17, 2014 | Uncategorized
The MACD indicator is a useful addition to any stock trading strategy. It is a good measure of momentum, trend direction and can also be a good guide to the relative strength of the market, indicating whet…her the market is overbought or oversold.
However, like all technical indicators there are a number of advantages and disadvantages that any trader should know before incorporating it into their strategy.
WinWay TradingExpert Pro chart of MACD with default 12, 26, 9 settings on SPY
Disadvantages
The main disadvantage of the MACD indicator is that it is subjective to the user. Like many technical indicators , the MACD has settings that can be changed to give almost limitless numbers of variations which means results will always differ from person to person. A trader must decide for example what moving averages to choose. The suggested settings are the 12 day moving average, 26 day and 9, however, these can easily be changed. Secondly, a trader must know what timeframe the MACD works best on and there are no easy answers, since the MACD will tend to work differently across different markets. Generally, however, the MACD works best when it is confirmed across several different timeframes – especially further out timeframes such as the weekly chart.
Lagging indicator
Unless using the momentum divergence strategy which seeks to pick tops and bottoms before they occur, the MACD has an inherent disadvantage that occurs with all technical indicators that concern price history such as moving averages. Since moving averages are lagging indicators, in that they measure the change in a stock price over a period of time (in the past), they tend to be late at giving signals. Often, when a fast moving average crosses over a slower one, the market will have already turned upwards some days ago. When the MACD crossover finally gives a buy signal, it will have already missed some of the gains, and in the worst case scenario it will get whipsawed when the market turns back the other way. The best way to get around this problem is to use longer term charts such as hourly or daily charts (since these tend to have fewer whipsaws). It is also a good idea to use other indicators or timeframes to confirm the signals.
Early signals
While the crossover strategy has the limitation of being a lagging indicator, the momentum divergence strategy has the opposite problem. Namely, it can signal a reversal too early causing the trader to have a number of small losing traders before hitting the big one. The problem arises since a converging or diverging trend does not always lead to a reversal. Indeed, often a market will converge for just a bar or two catching its breath before it picks up momentum again and continues its trend.
The solution to such limitations, once more, is to combine it with other indicators and use different confirmation techniques. The ultimate test is to set the MACD up in code and test the indicator yourself on historical data. That way you are able to find out when and in which situations and conditions the indicator works best.
The MACD is one of over 100 indicators available in WinWay TradingExpert Pro, Darren Winter’s preferred trading software
Jan 9, 2014 | Uncategorized
Original article by Ajay Pankhania
AIQ Code by Richard Denning
The code for John Ehlers’ article is not provided for AIQ. Instead I substituted an article from the September 2013 Stocks and Commodities issue by Ajay Pankhania, “Muscle Up Those Averages”.
I thought this basic code might be useful to beginning AIQ Expert Design Studio users as it illustrates how to code multiple versions of the simple and the exponential moving averages as well as the MACD indicator. Also the simple moving average crossover system and the MACD crossover systems are coded.
EDS Code:
!MUSCLE UP THOSE AVERAGES
!Author: Ajay Pankhania, TASC Sept 2013
!Coded by: Richard Denning 11/10/2013
!www.TradersEdgeSystems.com
!INPUTS:
price is [close].
smaLen1 is 50.
smaLen2 is 200.
emaLen1 is 12.
emaLen2 is 26.
emaLen3 is 9.
!CODE FOR SIMPLE MOVING AVERAGE OF PRICE:
SMA1 is simpleavg(price,smaLen1).
SMA2 is simpleavg(price,smaLen2).
!CODE FOR CROSSOVER SYSTEM:
BuySMA if SMA1 > SMA2 and valrule(SMA1 < SMA2,1).
SellSMA if SMA1 < SMA2 and valrule(SMA1 > SMA2,1).
!CODE FOR EXPONENTIAL MOVING AVERAGES (FOR MACD):
EMA1 is expavg(price,emaLen1).
EMA2 is expavg(price,emaLen2).
!CODE FOR MACD:
Fast is EMA1 – EMA2.
Signal is expavg(Fast,emaLen3).
!CODE FOR MACD SYSTEM:
BuyMACD if Fast > Signal and valrule(Fast < Signal,1).
SellMACD if Fast < Signal and valrule(Fast > Signal,1).
Jan 9, 2014 | Moving averages, Stocks & Commodities Traders Tips
Original article by Ajay Pankhania
AIQ Code by Richard Denning
The code for John Ehlers’ article is not provided for AIQ. Instead I substituted an article from the September 2013 Stocks and Commodities issue by Ajay Pankhania, “Muscle Up Those Averages”.
I thought this basic code might be useful to beginning AIQ Expert Design Studio users as it illustrates how to code multiple versions of the simple and the exponential moving averages as well as the MACD indicator. Also the simple moving average crossover system and the MACD crossover systems are coded.
EDS Code:
!MUSCLE UP THOSE AVERAGES
!Author: Ajay Pankhania, TASC Sept 2013
!Coded by: Richard Denning 11/10/2013
!www.TradersEdgeSystems.com
!INPUTS:
price is [close].
smaLen1 is 50.
smaLen2 is 200.
emaLen1 is 12.
emaLen2 is 26.
emaLen3 is 9.
!CODE FOR SIMPLE MOVING AVERAGE OF PRICE:
SMA1 is simpleavg(price,smaLen1).
SMA2 is simpleavg(price,smaLen2).
!CODE FOR CROSSOVER SYSTEM:
BuySMA if SMA1 > SMA2 and valrule(SMA1 < SMA2,1).
SellSMA if SMA1 < SMA2 and valrule(SMA1 > SMA2,1).
!CODE FOR EXPONENTIAL MOVING AVERAGES (FOR MACD):
EMA1 is expavg(price,emaLen1).
EMA2 is expavg(price,emaLen2).
!CODE FOR MACD:
Fast is EMA1 – EMA2.
Signal is expavg(Fast,emaLen3).
!CODE FOR MACD SYSTEM:
BuyMACD if Fast > Signal and valrule(Fast < Signal,1).
SellMACD if Fast < Signal and valrule(Fast > Signal,1).
Jan 7, 2014 | Uncategorized
If there is one is universally true statement that I can make about trading systems in general and in specific, it is this – they sure are fun when they work.
When I first started trading – back in what I longingly refer to as the “Hair Era” in my life – I figured that I would be a “gut” trader – i.e., I was determined to rely on my keen instincts and intuitive reasoning to decide when to buy and sell based on current market conditions.
That was not fun. After continually getting sucked into the swirling vortex of emotion – not to mention the abject fear associated with seeing your money disappear – I found that I was getting the, um, back of my front so to speak, burned so many times that I was having difficulty, um, sitting down, so to speak.
Eventually I evolved into a systematic trader. Now I am able to sit down much more often. A few strategies that I have developed over the years have stood the test of time and become something of “bread and butter” strategies. And they sure are fun when they work. To wit….
Jay’s Pure Momentum System
In 2001, I published an article in “Technical Analysis of Stocks and Commodities” magazine titled “Trade Sector Funds with Pure Momentum”, which detailed one specific and simple trading method. While in fact this is only one of many sector trading systems that I have developed over the years – and not necessarily the best one – it remains one of my favorites. Probably because it is just so gosh darn simple. When I was young my Momma told me to be a simple kind of man (or was it a Freebird she told me to be?). Well, in any event, here are the “simple kind of rules” using Fidelity Select Sector funds:
– After the close of the last trading day of the month identify the five Fidelity Select Sector funds that have the largest gain over the previous 240 trading days.
– For this system, ignore Select Gold (ticker FSAGX). If FSAGX appears in the top 5 funds then skip it and include the 6th highest rated funds.
– If fewer than five funds showed a gain over the previous 240 trading days, then hold cash in that portion of the portfolio (i.e., if only 3 funds showed a gain, then 60% of the portfolio would be in those funds and 40% of the portfolio would be in cash).
– If you sell more than one fund at the end of a month, then rebalance the proceeds in the new funds being purchased (example, you are selling Funds A and B and buying Funds C and D. You have $12,000 in Fund A and $10,000 in Fund B. Split the difference and put $11,000 each into funds C and D).
And that’s all there is to it.
The Results
Figure 1 displays the annual results of this method. 
Figure 1 – Jay’s Pure Momentum Annual Results
Figure 2 displays the current portfolio.
Figure 2 – Jay’s Pure Momentum Current Portfolio
My opinion as to why this system has performed well over the years is, well – what else – simple. The effects of a positive change in the fundamentals for a given industry or sector typically take a long time to play out. Thus, by finding the sectors that are performing well you very often find the sectors that are most likely to continue to perform well for a while.
Figure 3 – 12/31/13 Test (Courtesy: AIQ TradingExpert) Figure 4 – Several Current Sector Fund Holdings (Courtesy: AIQ TradingExpert)
Summary
Obviously 2013 was a banner year for this system. There is nothing like a rip roaring bull market to help things along. A couple of caveats:
*First off, sometimes people new to momentum investing will look at the charts in Figure 4 and say “Whoa, these things have already rallied sharply, I’m not jumping into those.” That’s something you’ll have to get over to use this system.
*Secondly, while the long-term yearly numbers look pretty good, there was about a 45% drawdown along the way in 2008. So it is not for the faint of heart.
*One other danger is that some people see +48.8% for the year in 2013 and get it in their head that this will occur again often. History suggests otherwise.
Still, an average annual return of +20.7% since 1990 (versus +8.9% for the S&P 500) isn’t bad – especially for a “Simple Kind of System.”
Best of Good Fortune in 2014.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.
Jan 7, 2014 | group sector rotation, sector funds
If there is one is universally true statement that I can make about trading systems in general and in specific, it is this – they sure are fun when they work.
When I first started trading – back in what I longingly refer to as the “Hair Era” in my life – I figured that I would be a “gut” trader – i.e., I was determined to rely on my keen instincts and intuitive reasoning to decide when to buy and sell based on current market conditions.
That was not fun. After continually getting sucked into the swirling vortex of emotion – not to mention the abject fear associated with seeing your money disappear – I found that I was getting the, um, back of my front so to speak, burned so many times that I was having difficulty, um, sitting down, so to speak.
Eventually I evolved into a systematic trader. Now I am able to sit down much more often. A few strategies that I have developed over the years have stood the test of time and become something of “bread and butter” strategies. And they sure are fun when they work. To wit….
Jay’s Pure Momentum System
In 2001, I published an article in “Technical Analysis of Stocks and Commodities” magazine titled “Trade Sector Funds with Pure Momentum”, which detailed one specific and simple trading method. While in fact this is only one of many sector trading systems that I have developed over the years – and not necessarily the best one – it remains one of my favorites. Probably because it is just so gosh darn simple. When I was young my Momma told me to be a simple kind of man (or was it a Freebird she told me to be?). Well, in any event, here are the “simple kind of rules” using Fidelity Select Sector funds:
– After the close of the last trading day of the month identify the five Fidelity Select Sector funds that have the largest gain over the previous 240 trading days.
– For this system, ignore Select Gold (ticker FSAGX). If FSAGX appears in the top 5 funds then skip it and include the 6th highest rated funds.
– If fewer than five funds showed a gain over the previous 240 trading days, then hold cash in that portion of the portfolio (i.e., if only 3 funds showed a gain, then 60% of the portfolio would be in those funds and 40% of the portfolio would be in cash).
– If you sell more than one fund at the end of a month, then rebalance the proceeds in the new funds being purchased (example, you are selling Funds A and B and buying Funds C and D. You have $12,000 in Fund A and $10,000 in Fund B. Split the difference and put $11,000 each into funds C and D).
And that’s all there is to it.
The Results
Figure 1 displays the annual results of this method.
Figure 1 – Jay’s Pure Momentum Annual Results
Figure 2 displays the current portfolio.
Figure 2 – Jay’s Pure Momentum Current Portfolio
My opinion as to why this system has performed well over the years is, well – what else – simple. The effects of a positive change in the fundamentals for a given industry or sector typically take a long time to play out. Thus, by finding the sectors that are performing well you very often find the sectors that are most likely to continue to perform well for a while.
Figure 3 – 12/31/13 Test (Courtesy: AIQ TradingExpert)
Figure 4 – Several Current Sector Fund Holdings (Courtesy: AIQ TradingExpert)
Summary
Obviously 2013 was a banner year for this system. There is nothing like a rip roaring bull market to help things along. A couple of caveats:
*First off, sometimes people new to momentum investing will look at the charts in Figure 4 and say “Whoa, these things have already rallied sharply, I’m not jumping into those.” That’s something you’ll have to get over to use this system.
*Secondly, while the long-term yearly numbers look pretty good, there was about a 45% drawdown along the way in 2008. So it is not for the faint of heart.
*One other danger is that some people see +48.8% for the year in 2013 and get it in their head that this will occur again often. History suggests otherwise.
Still, an average annual return of +20.7% since 1990 (versus +8.9% for the S&P 500) isn’t bad – especially for a “Simple Kind of System.”
Best of Good Fortune in 2014.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.
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