Karma Trades

What is it? 

The Moving Average Convergence Divergence, also known as MACD, is a trend following and momentum indicator that is based on the relationship between two moving averages.

How is it calculated?

It is calculared by substracting the 26 day Exponential Moving Average (EMA) from the 12 day EMA and plotting it, that's the MACD; then another 9 day EMA is plotted and it is called the signal line.

How to use it:

There are three common methods used to interpret the MACD:

1. Crossovers - As shown in the chart, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering into a position too early, as shown by the first arrow.

2. Divergence - When the security price diverges from the MACD. It signals the end of the current trend.

3. Dramatic rise - When the MACD rises dramatically - that is, the shorter moving average pulls away from the longer-term moving average - it is a signal that the security is overbought and will soon return to normal levels.

Variants

The Histogram

Sometimes you will have the option to plot the MACD histogram. This is a series of bars that show the distance between the MACD and the signal line.



















The histogram works as an early indicator for the trend change. When the histrogram's slope changes direction it is signaling a decrease on the trend momentum and then a probable trend change.

Different values

Some people like to change the MACD default values to better suit their trading style. One popular set of values is 13 for the long term EMA, 6 for the short term and 5 for the signal line.

This will make the MACD more responsive to price movements and it's useful when trading shorter timeframes.

What happened is that I opened a Suretrader Account and tried out daytrading.

The result?

Well, lets say that daytrading is not for me at the moment and I'm switching back to Swing Trading.
Finding out what trading style is best for you is one of the most important steps to building a successful trading career. Finding out that Daytrading is probably not for me was a costly but important lesson. You can clearly see all this in my profitly profit chart.

I'm definetly not proud about this outcome, nor my results, but I acknowledge that trading is not an easy career and that there will be multiple obstacles along a way with no signs.

Another interesting discovery during this couple months of no posting was that I was no longer interested in stock picks/alerts and I mean all of them: Not those from Jason Bond nor Tim Sykes nor ClayTrader. Don't get me wrong, those guys are legit and each has a successful trading style.

But for some reason my interest in being self sufficient is stronger than ever. I have a deep desire of building a trading style of my own. Of course I'll be checking out all the learning material of those newsletter that I'm subscribed to, but I'm no longer interested in their picks.

From now on I'm focused on developing my own trading style, a style that deeply resonates within myself, as I think every aspiring trader should.

Thats pretty much all I had to say.

I'll be doing more posts about trading and pretty much everything that catches my eye and think that its worth sharing along with my watchlists.

And remember kids, "it ain't about how hard you hit, it's about how hard you can get hit and keep moving foward, how much you can take and keep moving foward, thats how winning is done!".