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Hi Jim,
I've to thank you because you writes in easy words (and very good English)
what I tried to tell.
Perfect explanation and suggestion :-)
Rob
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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 DeanTo
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