No. of Recommendations: 4
StockCharts is probably the easiest and best place online for info on using technical analysis and its tools, one of which is MACD (which is a moving average of the difference between two moving average on which yet another MA is imposed to create buy/sell signals). The default values are (12, 26, 9), but they needn't be for at least three reasons. (1) Current markets trade at different speeds than those of George Lane's time (the inventor). (2) Each tradable has it own personality. (3) If you're using the same parameters as everyone else, you're with the crowd instead of ahead of it, which means you've paid price-risk to reduce information-risk. So, let's tweak MACD.

Typically, the MA pair that forms the basis of MACD are exponential MAs, but they needn't be. Depending on your software package, other MA types can be chosen. E.g., at FreeCharts, MAs can be simple, exponential, or weighted. STOCKALZE provides 9 types. Some packages offer a dozen or more types, nearly all of which are unnecessary, because nearly any type can be approximated by nearly any other type just by adjusting their computation periods. My preference is to use either simple or front-weighted. But anything can be made to work, and not much back-testing time should be spent investing which might be "the very best". In technical analysis, "good enough is good enough".

Where time is well-spent is on choosing the periods used for the MA pair. The defaults are (12, 26, 9). If '26' is increased to '27', the signals aren't going to be materially different, but the math becomes easier, because the relationship between the three is (4x, 9x, 3x), from which a faster, 2/3rds version of MACD can be created, (8,18,6), and a slower, 1-1/3rds version might be (16, 36, 12). Obviously, one could waste a lot of time back-testing every possible variant. But I think it's useful to have at hand at least one faster version and one slower version, depending on which of the five major trends one is trying to capture and depending on how illiquid the tradable is.

Arindam
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