The setups I include on this blog are used in conjunction with the 3/10macd and the criteria I ascribe to it as a way to alert me to an existing condition of price. The key concept to take away from this blog is that I try to anticipate what will happen on the higher time frame by using a faster time frame to trigger the trade setup. I do not trade a "system" I use two indicators to clue me in to price conditions. Please read the Disclaimer located in the sidebar of this site. I can be contacted via email at toddstrade@gmail.com
I am always open to questions, comments, or suggestions on how to improve this blog.


Friday, October 3, 2008

3/10 MacD

An indicator I use on most of my charts is the 3/10 MACD.  The 3/10 line is the difference between a 3 and 10-period Simple Moving Average (Fast Line) while the 16-line (Slow Line) is a 16-period simple moving average of that 3/10 differential.  Below is a chart with price removed with a 3-period simple moving average and a 10-period simple moving average.  Simply a method to help visualize the concept.

This oscillator was made "popular" by Linda Bradford Raschke (LBR), and you can find plenty of information regarding her techniques throughout the internet.  You can also find plenty of information dealing with the 3/10macd, as well as tips in how I use it, within this blog and particularly in the documents listed in the sidebar on the right hand side (just request to view and I will gladly accept).
And, here you can read a Q&A pertaining to the 3/10 macd.

You can use this on any time frame and it helps in highlighting the momentum behind moves; especially tops and bottoms where it can tip off divergences. Be warned however, like most oscillators, it is not very helpful in extremely high or low momentum environments. So, where there are sideways choppy markets and large momentum thrusts (including gaps), you may want to employ a different approach without this oscillator.
To me, this is an invaluable tool for short-term trading as it is very responsive to price, helping to smooth some of the noise which may be distracting.

Here are a few examples of some simple divergences:

Also handy, this oscillator can help alert you to a new higher high or lower low.  Known as the "First Cross" you will notice that when the slow line crosses above or below the zero line for the first time and the fast line corrects into it, we have a First Cross buy or sell trigger.


Another example:

6 comments:

Corey said...

Todd,

Thank you for the link and mention. I couldn't live without this useful indicator, introduced to me by Raschke.

I wanted to point out a little nuance in the standard MACD and Raschke's 3/10 Oscillator. The classic MACD uses Exponential Moving averages (default 12 and 26) for its calculation, yet the 3/10 Oscillator uses Simple Moving Averages (3 and 10).

It's a subtle difference and most of the time it doesn't matter, but Raschke finds SMAs work better for analysis than EMAs. In TradeStation, you can program this with a change in the MACD formula if need be.

Keep up the good work!

Corey

todd said...

Thanks Corey,
I knew about that nuance, but completely forgot about it! I actually have a 3rd party 3/10 from the TS forums, but have settled into using the tweaked macd. You said; "most of the time it doesn't matter."
I'd be curious to know when/how it does matter?

Corey said...

I've seen different readings in marginal momentum highs lows, particularly when students would send me an example to review and they would use the standard MACD and claim there was a new high, when I'd use my own charts to review the example and there would not be a new high. Conversely, I would ask them "Why did you not identify a NMH or NML at this point?" and they would respond "because there isn't one" when the discrepancy came down to the EMA vs the SMA.

I guess it matters more when there's a large volatility price move in recent data, as the EMA will pick it up quicker and weight it heavier than a SMA where all bars are treated equally.

todd said...

Thanks for responding Corey,
I've also noticed a slight (one bar or two) difference in when the slow average crosses the zero-line.
Which could make a difference if you try to trade LBR's "first cross" method.
The EMA tends to cross sooner than the SMA. Or, at times the EMA will cross the zero-line while the SMA comes close before turning the other way.
-todd

Jules said...

Todd,
Thanks for the very informative post. I checked out LBR and Corey's blog on 3/10, but haven't the time to really digest the information. I've put it on for my trades (paper trades)for the first time yesterday but haven't paid much attention to it since I don't really know how it works. So far, I've been using MACD's histogram and Stoch to look for divergence.
Just want to let you know that you've put up a really nice post.

todd said...

Thanks Jules. I find this indicator very helpful to see the turning of trends or corrections, and how much oompf there is behind such move. The rounding of tops and bottoms (decreasing range expansion) and price/momentum divergences really stands out too. Good luck to you!
-todd