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Hey, Preston ... it makes sense in Spain! ;~)
--- In Metastockusers@xxxxxxxxxxxxxxx, "P Umrysh" <pumrysh@xxxx>
wrote:
> 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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