Find Elusive MACD Divergences Easily

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Find Elusive MACD Divergences Easily By using a Custom TradeStation Workspace After following these instructions, you will have Charts displaying MACD lines and histogram which highlight

1 Find Elusive MACD Divergences Easily By using a Custom TradeStation Workspace After following these instructions, you will have Charts displaying MACD lines and histogram which highlight price/indicator divergences Color-coded price bars indicating buy and sell signals similar to the backtested strategy Scans to show which stocks in your symbol list got a buy signal and a sell signal TradeStation strategy implementing the best of the strategies tested by BackTesting Report o Note: Implementation modified to backtest one market at a time. The TradeStation Workspace applies what you learned in the companion BackTesting Report. You can further your education about MACD by Seeing the strategies in action on your favorite charts Tweaking the strategy to add your own rules Check results over your own dates and stocks with Strategy Performance Report Forward testing by tracking buy and sell signals as they occur in the future To understand MACD Divergences and their hypothetical past performance see the Backtesting Report titled Finding Big Bottoms with MACD Bullish Divergences. Before actually investing with these strategies, you are strongly advised to read the MACD BackTesting Reports, consider the risk of loss, maybe even consult a professional for advice. Ultimately, you make your own decisions about your own money. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. Install TradeStation If you don t already have TradeStation, you will need to download and set it up. Please see for more information. The custom software from BackTesting Report supports version 9.0 or later. If you insist on an earlier version of TradeStation, see the last section of this document for instructions on building a workspace from scratch and copying the source code from text files. 1

Install BackTesting Report Custom WorkSpace and EasyLanguage Scripts 1.

exe After agreeing to license terms, download and unzip according to the instructions below.

ELD file into TradeStation and put all the.tsw files in the TradeStation MyWork folder.

2 Install BackTesting Report Custom WorkSpace and EasyLanguage Scripts 1. Download the file BTR8_TradeStation.exe After agreeing to license terms, download and unzip according to the instructions below. This package contains two file types. Import the BTR_MACD_DIVS.ELD file into TradeStation and put all the.tsw files in the TradeStation MyWork folder. The instructions below apply to the MACD Divergence BTR8_TradeStation.exe files you download in this step. a. (Firefox: Save the file to your desktop and then double-click it to Run.) b. c. First browse for location and pick an easy temporary location like the Desktop d. 2

3 e. 2. Open TradeStation 3. Import the ELD files into TradeStation (before opening the workspace): a. Choose File->Import/Export EasyLanguage from the TradeStation menu b. Choose Import EasyLanguage file (ELD,ELS,ELA) and click Next 3

4 c. Browse to find BTR_MACD_DIVS.ELD on Desktop from step 2: d. Click Next to Import all Analysis Types: e. Don t replace any TradeStation built in functions, just import stuff named BTR_ and a function called XavgRadarScreen 4

5 f. IMPORTANT: If it asks to replace any other functions, answer No. 4. Put all the workspace files (BTR_MACDH_Div.tsw, BTR_MACDH_Div.tsw, etc) into C:\Program Files\TradeStation (version)\my Work 5

5. On the TradeStation menu, click File->Open WorkSpace and choose BTR_MACDL_Div.tsw, or BTR_MACDH_Div.tsw, etc. The workspace will appear with a large chart window open as shown in Figures 1.

6 5. On the TradeStation menu, click File->Open WorkSpace and choose BTR_MACDL_Div.tsw, or BTR_MACDH_Div.tsw, etc. The workspace will appear with a large chart window open as shown in Figures 1. Figure 1-TradeStation Screenshot of MACDL_Div workspace. Understanding the MACD Divergence Workspaces and Strategy All workspaces included in this package follow the same general layout. The price is plotted in the top portion of the chart window. Positive divergences are color-coded green, and negative divergences are marked in red. The neutral-colored bars are ignored in this strategy. The middle indicator is the MACD. Most strategies are installed with the standard MACD settings of 12,26,9 lines and histogram. The BTR_MACDL_Div_Pwr strategy relies on the 12,26,9 MACD Lines and the slower 19,39,9 MACD. BTR_MACDL_Div_Pwr also plots the MACD as Appel s Histogram. You may plot any MACD line as Appel s Histogram by selecting the MACD line, right-click, choose Format MACD, click the Style tab, select Plot of MACD and Type of Histogram. If present, the bottom indicator is volume. A buy signal only takes place if volume is above the threshold set as an input. The units are hundreds of shares, so a setting of 5000 is 500,000 shares. If you change the timeframe on the chart, you probably want to adjust this parameter in the strategy, PaintBars, ShowMes, and indicators. When a divergence is detected at the right edge of the chart, an alert is given, and text instructions printed on the chart. The instructions include suggestions for a stop loss and trade size. These suggestions are based on the input settings for risk_amt (in dollars) and ATR_factor. The stop loss is calculated by multiplying the ATR by the ATR_factor and subtracting from the long entry price (or adding to a short entry price). The entry price is estimated as the closing price of the current bar. Unless otherwise noted, the strategy enters at market on the next bar 6

so the actual entry price will vary. The size suggestion is calculated as the number of shares that will put risk_amt in play, assuming the calculated stop loss.

7 so the actual entry price will vary. The size suggestion is calculated as the number of shares that will put risk_amt in play, assuming the calculated stop loss. The stop price for the life of the trade is calculated based on the average true range (ATR) on the day of the buy signal. It is held constant and displayed above the price for the life of the trade. To reposition it for readability, left click to select it and drag it to where you want it. If it won t go where you want it, right click and select Snap Mode to turn it off. The blue arrows and blue dotted lines are the TradeStation strategy back-testing engine simulated trades. The number of shares is based on the risk amount and stop input factors. Unless otherwise noted, the strategies are all long-only, meaning that they buy on positive divergences and sell on negative divergences. The indicators, PaintBars, and ShowMes will mark positive and negative divergences equally. Types of Divergence Detectors This package contains several different types of MACD Divergence Detectors. MACD Lines Divergences The BTR_MACDL_Div workspaces and EasyLanguage code detects divergences on the MACD Lines. This is the most general of the workspaces, and a good place to start getting familiar with MACD and this software. The definition of divergence is taken from Gerald Appel the inventor of the MACD. It requires that is that price makes a higher high (or lower low) which is not confirmed by the MACD line. It also requires the MACD line below zero for positive divergence and above zero for negative divergence. It places no requirements on crossing the zero line or lines crossing each other. Figure 2 - TradeStation Screenshot of MACDL_Div workspace. 7

The example in Figure 2 shows both positive and negative divergences marked on the price history. The gray text near the right edge helps you anticipate MACD Divergences.

8 The example in Figure 2 shows both positive and negative divergences marked on the price history. The gray text near the right edge helps you anticipate MACD Divergences. When a divergence is near at hand, it calculates the price that would make a MACD Divergence occur. MACD Histogram Divergences The BTR_MACDH_Div series of workspaces and EasyLanguage code detect divergences on the MACD Histogram. The definition of divergence is taken from Dr. Alexander Elder. The histogram is defined as the difference between the MACD line and its signal line. The definition of divergence is that price makes a higher high (or lower low) which is not confirmed by the MACD Histogram. The MACD lines must be below zero for positive divergence and above zero for negative divergence. The MACD Histogram must break the back of the bear (or bull) between humps of the divergence. For a positive divergence, this means that the histogram begins below zero and crosses above zero before the price low. At the point of the price low, the histogram may be either above or below zero. Likewise for a negative divergence, the histogram must start above zero and cross below zero at least once. See Figure 3. Figure 3 - TradeStation Screenshot of MACDH_Div workspace. MACD Power Tools Divergences The BTR_MACDL_Div_Pwr strategy refers to the 50-day ema to decide the settings for the MACD. If price is above the 50 DEMA, it uses the 12,26,9 MACD Lines to detect positive divergences. If price is below the 50 DEMA it uses the slower 19,39,9 MACD lines settings to detect positive divergences. The slower settings are always used to detect negative divergences. Note in Figure 3 that the MACD lines are plotted as Appel s Histogram. 8

9 Figure 3 - TradeStation Screenshot of MACDL_Div_Pwr workspace. Fuzzy Divergences While the other strategies take a hard-line approach to detecting divergences, the BTR_MACDL_Fz_Div strategy allows for more flexibility. It defines a divergence as a double bottom or double top where the price does not necessarily hit a new low or new high. If the price is sufficiently close it will treat it as a double bottom (or top) and check for confirmation of reversal from the MACD lines. For example, see Figure 4. The positive divergence detected in August of 2006 in Figure 4 below is an example of a fuzzy divergence. The price did not come all the way back down to test the lows of July but did come close enough to flag a divergence since the other conditions were present (MACD lines below zero and rising with MACD above signal line). 9

Figure 4 - TradeStation Screenshot of MACDL_Fz_Div workspace. You decide how close is close enough by setting inputs to the MACDL_Fz_Div Strategy, Indicator, PaintBar, and ShowMe.

10 Figure 4 - TradeStation Screenshot of MACDL_Fz_Div workspace. You decide how close is close enough by setting inputs to the MACDL_Fz_Div Strategy, Indicator, PaintBar, and ShowMe. The units are Average True Range (ATR) a measure of volatility of each individual market. Control how far the local low is from the price at macdl low for a positive divergence with two parameters: 1. Low_bound_pos : the allowed multiple of ATR below the low - makes sure price is not too low set to 0 to require the local low is higher than the price at macdl low set to +1 to limit a local low to within 1 ATR lower than the price at macdl low set to + 2 to limit a local low to within 2 ATR lower than the price at macdl low 2. Upper_bound_pos: the multiple of ATR above the low - makes sure the price is low enough set to 0 to require a new low of any kind set to +1 to require a local low within 1 ATR higher than the price at macdl low set to + 2 to require a local low within 2 ATR higher than the price at macdl low set to -1 to require the local low to be 1 ATR lower than the price at macdl low (can be used to wait for more significant divergences in down markets) DO NOT Set BOTH to 0... or nothing will qualify Control how far the local high is from the price at macdl high for a negative divergence with two parameters: 1. Low_bound_neg : the allowed multiple of ATR below the high - makes sure price is not too low set to 0 to require the local low is higher than the price at macdl low set to +1 to limit a local high to within 1 ATR lower than the price at macdl high set to + 2 to limit a local high to within 2 ATR lower than the price at macdl high 10

11 set to -1 to require the local high to be 1 ATR high than the price at macdl high (can be used to wait for more significant divergences in up markets) 2. Upper_bound_neg: the multiple of ATR above the high - makes sure the price is low enough set to 0 to require a high of any kind set to +1 to require a local high within 1 ATR higher than the price at macdl high set to + 2 to require a local high within 2 ATR higher than the price at macdl high DO NOT Set BOTH to 0... or nothing will qualify Volume Surge and Divergences Extensive backtesting showed that a volume surge in conjunction with a divergence reduced the win rate of the divergence, especially for positive divergences. The BTR_MACDL_V_Div allows you to filter out divergences when the volume exceeds the average. The moving average of volume is calculated according to Vmalength. If the volume at the low or high for positive or negative divergences respectively exceeds the average multiplied by the input surge_pos or surge_neg, the divergence is ignored. Figure 5 - TradeStation Screenshot of MACDL_V_Div workspace. 11

Alerts TradeStation Alerts are enabled on the ShowMe analysis technique. TradeStation will audibly tell you when a divergence is detected on the last bar of the chart.

12 Alerts TradeStation Alerts are enabled on the ShowMe analysis technique. TradeStation will audibly tell you when a divergence is detected on the last bar of the chart. The settings can be changed on the Alerts tab of the Format Analysis Technique dialog box. For more information, see the TradeStation documentation on the use of alerts. Using the TradeStation Scanner to Find MACD Divergences You can use the custom Indicators in this package with the TradeStation Scanner to detect MACD Divergences occurring in a list of symbols. Follow the TradeStation instructions for setting up the scanner. For the scan criteria, select one of the indicators in this package. For example, BTR_MACDL_Div to find MACD lines divergences or BTR_MACDH_Div to find MACD histogram divergences. Set the criteria to Display, as shown in Figure 4 below. Figure 4 Scanner Criteria Setup (TradeStation Screenshot) The scan results are displayed as a column of numbers indicates no divergence detected. A positive number indicates a positive divergence and, in most cases, the number is the position size calculated using the risk amount and the ATR stop distance given as inputs (defaults are $1000 and 3 ATR respectively). A red 0.00 or a negative price indicates a negative divergence. BTR_MACDL_A_Div indicator displays the price of the next anticipated divergence when used as a scan criteria. Note that the TradeStation scanner runs on a bar only after it is closed, even if real time data is present. That means that scanning while the market is open on a daily timeframe will be based on yesterday s data. The chart window will display the current bar in progress so that the scan is always working on the second to last bar on the chart while the market is open, regardless of timeframe. 12

Scanning for MACD Divergences with RadarScreen Three workspaces are set up to use TradeStation s RadarScreen to scan a symbol list for MACD and MACDH divergences.

13 Scanning for MACD Divergences with RadarScreen Three workspaces are set up to use TradeStation s RadarScreen to scan a symbol list for MACD and MACDH divergences. This is in a separate workspace because RadarScreen consumes the computer s resources and places unique requirements for custom EasyLanguage indicators. To scan the market, open either the BTR_MACDH_Div_RadarScreen, BTR_MACDL_Div_RadarScreen or the BTR_MACDL_Div_Pwr_RadarScreen workspace. The workspace comes configured with the components of the S&P500 as a symbol list to scan, however, you can insert any symbol list for which you have data. Just select a row on RadarScreen, right click, choose Insert Symbol list and pick from the list or simply type a symbol into a blank row. The third column in the RadarScreen row presents the results of the scan for MACD(H) divergences. A white indicates no divergence detected. A green number indicates a positive divergence and the number is the position size calculated using the risk amount and the ATR stop distance given as inputs (defaults are $1000 and 3 ATR respectively). See Figure for an example of a positive divergence flagged by the BTR_MACDH_Div indicator in Radarscreen. A red 0.00 indicates a negative divergence. See Figure for an example of a negative divergence flagged by the BTR_MACDL_Div_Pwr indicator in Radarscreen. Figure 5 - Radarscreen buy signal (TradeStation Screenshot) 13

Figure 6 - RadarScreen Sell Signal (TradeStation Screenshot) Known Issue: The results of the RadarScreen scan and the strategy on the chart do not always agree.

14 Figure 6 - RadarScreen Sell Signal (TradeStation Screenshot) Known Issue: The results of the RadarScreen scan and the strategy on the chart do not always agree. When there is a difference, the chart strategy reflects the results in the MACD Divergences BackTesting Report. RadarScreen required significant code changes, making that implementation different from the backtested one. 14

Advanced Instructions Changing Parameter Settings To change parameter values of the strategy: 1. Right click on the chart 2. Choose Format Strategies 3. Click the Format button 4.

15 Advanced Instructions Changing Parameter Settings To change parameter values of the strategy: 1. Right click on the chart 2. Choose Format Strategies 3. Click the Format button 4. Change parameters as desired Parameter definitions for the MACD Lines Divergence (BTR_MACDL_Div) and MACD Histogram Divergence (BTR_MACDH_Div) ELD modules in the MACD Divergence Detector are: Parameter Default Description Setting risk_amt 1000 Dollars to risk per trade. Influences stop loss and size calculations. min_volume 1 Minimum acceptable volume to enter. Set this to a low number for intra-day charts and a high number for daily, weekly, monthly charts. atr_factor 3 Multiple of Average True Range (ATR) for stop distance atr_len 20 Number of bars to collect data for ATR sep_len 6 Bars between the humps of MACD to check for a divergence extreme_period 50 Look-back period. How many bars to check backwards for a divergence macd_fast 12 Number of periods to use for fast EMA in MACD Line calculation macd_slow 26 Number of periods to use for slow EMA in MACD Line calculation SigLen 9 Number of periods to use for EMA in Signal Line calculation 15

16 Parameter definitions for the Power Tools (BTR_MACDL_Pwr_Div) ELDs: Parameter Default Description Setting risk_amt 1000 Dollars to risk per trade. Influences stop loss and size calculations. min_volume 1 Minimum acceptable volume to enter. Set this to a low number for intra-day charts and a high number for daily, weekly, monthly charts. atr_factor 3 Multiple of Average True Range (ATR) for stop distance atr_len 20 Number of bars to collect data for ATR sep_len 6 Bars between the humps of MACD to check for a divergence extreme_period 50 Look-back period. How many bars to check backwards for a divergence MA_period 50 Price must be above this EMA to use medium MACD settings macd_fast_med 12 Number of periods to use for fast EMA in medium MACD Line calculation (used for entries) macd_slow_med 26 Number of periods to use for slow EMA in medium MACD Line calculation (used for entries) macd_fast_slow 19 Number of periods to use for fast EMA in slow MACD Line calculation (used for exits) macd_slow_slow 39 Number of periods to use for slow EMA in slow MACD Line calculation (used for exits) SigLen 9 Number of periods to use for EMA in Signal Line calculation Parameter definitions for the Fuzzy MACD Lines Divergence Detector (BTR_MACDL_Fz_Div) ELDs: Parameter Default Description Setting risk_amt 1000 Dollars to risk per trade. Influences stop loss and size calculations. min_volume 1 Minimum acceptable volume to enter. Set this to a low number for intra-day charts and a high number for daily, weekly, monthly charts. Lower_bound_pos 1 Multiple of ATR below the low to control the range of acceptable positive divergences Upper_bound_pos 1 Multiple of ATR above the low to control the range of acceptable positive divergences Lower_bound_neg 1 Multiple of ATR below the high to control the range of acceptable negative divergences Upper_bound_neg 1 Multiple of ATR above the high to control the range of negative divergences atr_factor 3 Multiple of Average True Range (ATR) for stop distance atr_len 20 Number of bars to collect data for ATR sep_len 6 Bars between the humps of MACD to check for a divergence extreme_period 50 Look-back period. How many bars to check backwards for a divergence macd_fast 12 Number of periods to use for fast EMA in MACD Line calculation macd_slow 26 Number of periods to use for slow EMA in MACD Line calculation SigLen 9 Number of periods to use for EMA in Signal Line calculation 16

17 Parameter definitions for the Volume-Aware MACD Lines Divergence Detector (BTR_MACDL_V_Div) ELDs: Parameter Default Description Setting risk_amt 1000 Dollars to risk per trade. Influences stop loss and size calculations. min_volume 1 Minimum acceptable volume to enter. Set this to a low number for intra-day charts and a high number for daily, weekly, monthly charts. surge_pos 1.5 Volume surge on positive divergences is defined as surge_pos times the VmaLength EMA of volume surge_neg 1.5 Volume surge on negative divergences is defined as surge_neg times the VmaLength EMA of volume VmaLength 20 Length of EMA for volume surge measurement atr_factor 3 Multiple of Average True Range (ATR) for stop distance atr_len 20 Number of bars to collect data for ATR sep_len 6 Bars between the humps of MACD to check for a divergence extreme_period 50 Look-back period. How many bars to check backwards for a divergence macd_fast 12 Number of periods to use for fast EMA in MACD Line calculation macd_slow 26 Number of periods to use for slow EMA in MACD Line calculation SigLen 9 Number of periods to use for EMA in Signal Line calculation BackTesting The strategy back test is enabled. The TradeStation results summary is available from the menu: View->Strategy Performance Report. See TradeStation documentation for complete information on how to read the strategy report. Workspace Settings 1. On the Format Strategies tab, Click the Properties for All button a. In the lower left corner, set the Maximum Number of Bars Study Will Reference to 201 b. In the upper left corner, set the commission assumption. $0.005 per share was used for backtesting or set your own value 2. The Alerts are coded into Paint Bar EasyLanguage. To turn on Alerts, on the Format Analysis Techniques tab, a. Select the Paint Bar (name ends in _PB) b. Click the Format button c. Select the Alerts tab d. Check the box marked Enable Alerts e. Click Ok f. Click Close 17

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