How To Improve MACD Analysis

Hybrid Indicators help MACD users improve their trading success rate, by avoiding unreliable runs, whipsaw action, and low profit ratios.  To improve MACD, it is important to understand that the market structure has changed more in the past few years than in the prior 100 years. There are now nine market participant groups not just Wall Street versus Main Street, and there are many different kinds of trading venues including Dark Pools and Alternative Trading Systems, with a wide range of speed of execution. Therefore the use of MACD, with additional hybrid indicators that are written for the automated market of today improves technical analysis.

MACD signals when the shorter term price action gains momentum, and this creates the crossover signal. However, Dark Pools currently control about 13% of all trading activity. Their buying is off the exchanges and invisible to day traders, floor traders, and High Frequency Traders. Their orders are specialized specifically for their intent to not move price, but to hold it within their “buy zone” which tends to be about a 10-12% range based on price and trend development. This forces price sideways into what is called a “Platform” pattern. This sideways candlestick pattern causes MACD to signal false entries and exits, because the range of price is too tight. Whipsaws are chronic for traders attempting to buy or sell short a stock that is being held and controlled by Dark Pools, since the runs are so small that profitability is quickly wiped out by a retracement.

However Dark Pool buying activity can be seen with the use of hybrid indicators such as Time Segmented Volume, which compares current volume patterns to prior volume patterns over time. This center line Volume Oscillator is able to pick up their buying activity since all orders regardless of venue, must be cleared through the national clearinghouses daily. That means at the end of the day, even Dark Pool transactions are recorded. Time Segmented Volume tends to lead MACD by several days, whenever there is Dark Pool activity. This allows the trader time to evaluate the stock chart, analyze the risk of the trade, and determine if the risk to reward ratio is sufficient for their trading style.

Micron Technology Inc. MU is the chart example below, and is provided by Worden Bros TC2000 charting with permission and our thanks.

Since Dark Pools do not move price but do impact Volume patterns with their consistent incremental buying, Time Segmented Volume shown in the middle chart window leads price and leads MACD shown in the bottom chart window.

The green arrows on April 2014 show Time Segmented Volume with a V and then W bottom formation, which indicates early that this stock has volume accumulation going on that is overwhelming the sellers which were High Frequency Traders at that time. High Frequency Traders are algorithms that are triggered automatically primarily on news events. The stock decline was halted as Dark Pools buyers moved in quietly.  MACD catches up to Time Segmented Volume and crosses over after price moves up with momentum as indicated by the red arrows. Prior to that, MACD was showing downside crossovers.

Time Segmented Volume leads MACD, which can help the trader avoid a potential sell short trade that would have whipsawed causing a potential loss. The peak on Time Segmented Volume warns early that the run was exhausted abruptly, but MACD continues to show upside price action which doesn’t occur. Instead the stock shifts into the typical Platform sideways action that is formed with Dark Pools control price. Time Segmented Volume remains above its center line confirming that there are more buyers than sellers, even while price gyrates in a choppy pattern. Time Segmented Volume has a clear negative divergence from price as the stock moves up in June and early July, indicating that Dark Pools had commenced profit taking with some quiet distribution.  MACD continues to show upside momentum, however Time Segmented Volume warns that a negative divergence between consistent volume and price has occurred.

Summary: MACD users can improve their trading success and increase their profitability by incorporating new hybrid indicators which reveal giant lot order activity revealing quiet accumulation/distribution patterns, negative or positive divergences before price moves, and patterns including bottoming and topping within the indicators.