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Hi Alan
> Thanks for your excellent advice. As a newbie, it's difficult for me
> to know what to believe and what not to believe on the internet.
> That's why I wish I could analyse any formula that I find - such as
> the weekly MACD in my post.
> I found the weekly MACD histogram formula at:
> http://www.paritech.com/education/technical/custom/indicators/macd.asp
>
> I have already posted your reply on their Metastock forum, so
> hopefully they will remove their formula from their site, or at least
> try to justify it.
That will be interesting. I don't really want to get into an argument with Paritech but when I
plotted the formulas you posted the weekly one was so far off it was a joke
> There's a fiendishly complicated formula for weekly MACD at:
> www.users.bigpond.com/prominex/MetaStock/Roy-63.txt
This is my formula :-) , hence the name "Roy"
Yes it does look feindishly complicated but quite a bit of the formula has to do with making
allowances for things that can be wrong with the data so that it will exactly emulate the MetaStock
MACD values as plotted on a weekly chart. Try plotting my formula on a weekly chart and then plot
the MS drop-down indicator over the top of it. There will possibly be some differences at the left
side of the chart but values should agree to 4 decimal places at the right unless you only have a
small amount of history.
My weekly formulas attempt to create exact weekly data from the daily chart and are very accurate in
doing so. Most attempts at weekly data emulation are done on a "near enough is good enough" basis
but in my view that's not good enough. When you have thinly traded issues, suspensions,
reconstructions, Easter or Christmas breaks, and various other situations that cause gaps in the
data, great care has to be taken to ensure that the right days are included in the right weeks.
I could create simpler weekly indicators but for some issues they would be less accurate. Unless
they are accurate 100% of the time how do you know when they will be off? The thing with a weekly
formula (for daily charts) is that it must plot the same values that you would see for the standard
MS formula on a weekly periodicy chart. That's the only standard it can be judged by as far as I'm
concerned.
I can take you through a complete weekly formula and explain every detail if you wish. It would take
you a while to absorb but you would learn quite a lot.
> I suspect that the Paritech formula is trying to calculate MACD for
> Friday's closing prices only. I verified this by plotting all the
> individual bits and pieces as separate indicators, because I'm too
> inexperienced to understand the formula. (If you know anyone who
> understands the bit between the {start} and {end}, could you ask them
> to explain it. It doesn't matter whether they agree with it or not.
> At least I'll learn something.)
I could do this but my thinking is your time and mine would be better spent on studying something
that has underlying principles that give accurate results. I didn't attempt to study the Paritech
code (I may have if I'd known where it came from) but I plotted it alongside code I knew to be
accurate. It was so far off I didn't see any reason to investigate further.
> I suppose it makes some sense: the
> daily MACD formula is based on daily closing prices, so the weekly
> MACD formula is based on Friday's closing prices. Presumably, if
> there were a monthly MACD histogram, it would be based on monthly
> closing prices.
Exactly right. I could knock up a monthly MACD and it would only use the CLOSE for each month, just
as MetaStock would on a monthly periodicy chart. The plot that doesn't change for several bars may
look a little odd but when you think about it, it can't be any other way if it is a true
representation. A weekly MACD doesn't change value on Wenesday then again on Friday.
> I agree with your comment that the Paritech daily MACD is "slightly
> off". I found this description of the daily MACD histogram in a book
> by someone called Dr. Alexander Elder (why do all conmen and shysters
> call themselves "Dr"):
I don't know that I'd call Dr Elder a conman. He is widely respected in the trading industry and is
the author of a couple of "must have" books.
The reason why the Paritech MACD is slightly off is because they are using the convventional 12/26
"periods" to create the two exponential moving averages. This is widely accepted as normal so in one
sense these are "more" accurate than the MS version. You need to understand how an EMA is
constructed to understand why these differences show up.
An EMA adds a proportion of new data for evey bar, and it also retains a portion of old data
(previous value). If the proportion of new data added is 20% then the proportion of old data
retained is 80%. Can you see that? A standard EMA calculates the amount of new data to add like
this - 2/(1+periods). The actual construction of an EMA follows so that you can check the code for
yourself.
{Exponential Moving Average}
n:=Input("Periods",1,999,10);
R:=2/(n+1); {ratio of new data added each bar}
M:=If(Cum(1)=1,C,PREV*(1-R)+C*R);
M;
So the factor determining how much new data to add and how much old data to retain for a 12 period
and 26 period EMA is 2/13 and 2/27 respectively. In decimal terms this is 0.153846 and 0.074074.
Metastock actually uses values of 0.15 and 0.075 rather than basing on 12 and 26 periods, and that's
why the MetaStock MACD is slightly of the Paritech code.
> Page 129:
> 1. Calculate the 12-day and 26-day exponential moving averages of
> closing prices.
> 2. Subtract the 26-day EMA from the 12-day EMA to obtain the fast
> MACD line.
> 3. Calculate a 9-day EMA of the fast MACD line to obtain the slow
> Signal line. Plot both lines to obtain the classic MACD indicator.
> 4. Subtract the Signal line from the MACD line to obtain an MACD-
> Histogram.
This is the accepted norm but I think may be only only a close approximation of what the creator
intended. I honestly don't know which is the "authentic" version. At the end of the day they're only
numbers that we interpret how we want. Anyway I have no argument with the there being two different
versions because I understand the slightly different values that each version is based on.
> The "MetaStock canned version", as you call it, is bound to be
> superior, because at least I've heard of Equis :-), but I've never
> heard of Dr. Alexander Elder.
You have now :-) Don't write him off. There are many "experts" out there but just take what you can
use and leave the rest. My comment in my earlier reply "If this works for you then great, but a
weekly MACD it is not." applies across the board. If anything is suspect as to name or accuracy but
still works for you then don't throw it away, just make sure you understand the differences. At the
end of the day you have to use what works for you, not what some guru tells you works for everyone
else.
> Thanks for your help.
No problem. Remember that a fair bit of the above comments are my opinions only, and may not be
shared by others.
I meant what I said about being willing to walk you through any of my code if you want to learn.
Good luck.
Regards
Roy
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