Monday, December 11, 2006

MACD – Analysis of the Analysis

Yesterday’s post relative to the MACD and the value of selecting stocks when the histogram is below 0, specifically below -.1, had me thinking. When something as simple as that produces serious profits especially when the exit is just as simple – sell after four days of holding – there has to be a dynamic in place that I am just not seeing. Then, of course, like a bolt out of the blue it came to me – I select stocks for back testing by picking the highest volume stock of the set output by the filter on a daily basis. And stocks become high volume stocks because people either want them or don’t want them.

So back to the laboratory we went and we ran yet another test – this time for stocks with the same price range but volume based only. A one line filter – show all stocks between 15 and 35. Then for testing purposes, as always, pick the stock that has the highest volume.

I’m not going to keep you in suspense – using the same two periods I used in yesterday’s MACD test

Period 1 – equity result = $28865 / MACD < -.1 33602 / MACD > .1 19427
Period 2 – equity result = $13355 / MACD < -.1 27661 / MACD > .1 6115

In both periods the equity results of "volume only" was better than the equity results for those stocks picked because the MACD was greater than .1.

Again, stocks that are in distress – MACD histogram below 0, close below EMA 90 and the like – can be more profitable than stocks that appear to be in good shape.

As always do your own testing – I’m hoping that the materials here stimulate you to think about technical analysis and how it applies to the next stock you select to buy.

And remember investing in the stock market is just like poking yourself in the eye with a sharp pencil - it feels much better when you stop.

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