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Jim,
As always, words of wisdom!
I am confused though, I thought all cats were black at night.:-)
Preston
--- In Metastockusers@xxxxxxxxxxxxxxx, "Jim Dean" <hvacsage@xxxx>
wrote:
> Hi, folks:
>
> I think that RobinHood's idea of normalizing the MACD is a very
> fruitful thing to consider, if you are doing Explorations
to "rank"
> the relative values of MACD's (or their Histograms) across a large
> group of stocks.
>
> As a reminder, here are the relevant formulae:
> MACD = FastEMA(C) - SlowEMA(C)
> Histo = MACD - SignalEMA(MACD)
>
> This presumes that the nature of your system is somewhat different
> than the "classical" MACD signal logic. The classic approach is
to
> look for cases where the MACD (or its Histo) has crossed the zero
> line (one way or the other).
>
> If you use this approach, then there is no need for normalization,
> since 0=0=0 regardless of the price range of the stock. Or, as
the
> Spanish would say, "all cats are gray at night".
>
> However if you want to use the MACD (or its Histo) to
comparatively
> rank the "trend speed" (MACD) or "trend acceleration" (Histo) of
the
> stock's price action, then normalization of some sort IS required.
>
> The "units" of the MACD are "change in dollar value". Most trading
> decisions need to be made on dollar-value change VERSUS the
dollars
> at risk (where risk = stoploss related, equity related, or both).
>
> Let's say, for example, we prequalify our trades by finding stocks
> whose Histo's have just crossed up through the zero line. That
does
> not require normalization.
>
> Now let's presume (for discussion) that amongst those recent
> crossovers, we think that stocks which have a steeper MACD slope
> offer better trading opportunities than ones with gentle slopes.
> Keep in mind that a steep MACD slope indicates the FastEMA is
> separating quickly from the SlowEMA.
>
> In that case, we need to SORT the results of the Exploration based
on
> a column with a formula something like MACD(today)-MACD
(yesterday).
> Higher values represent faster increases in dollars per day.
>
> However a change of 0.10 per share per day in the FastEMA-SlowEMA
of
> a $1.00 stock is much more significant to our pocketbook than that
> same 0.10 change for a $100 stock ... we might typically own 100
> shares of the $100 stock, but would have 10,000 shares of the $1
> stock!
>
> Thus the need for normalization. A comparison like that is better
> done by first finding the change-in-dollars-PER-COMMITTED-DOLLAR,
> then doing the Exploration Sort. That is, a comparison of 0.10/$1
> verus 0.10/$100 would provide us a more useful metric.
>
> One way to do this normalization is to first calculate the MACD,
then
> divide by the most recent price:
> ( Mov(C,FastMA,E) - Mov(C,SlowMA,E) ) / C
> However to get a true normalization, we should use the
> same "reference base" in the denominator as we use in the
numerator:
> ( Mov(C,FastMA,E) - Mov(C,SlowMA,E) ) / Mov(C,SlowMA,E)
>
> Either of these approaches will provide a metric for comparison
> across multiple stocks that is useful for determining which has a
> higher "trend speed". I personally prefer the second of the two.
>
> A similar argument can be made for comparing the "trend
acceleration"
> differences between stocks, by normalizing their Histo values.
>
> Jim Dean
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