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.


Sunday, January 16, 2011

Final Post...

 ...on the matter of the 3/10 MACD oscillator and how to effectively use it for intra-day trading.  Other posts on the subject can be referenced  HERE and HERE.   While previous posts dealt mostly with the construction of the indicator and price relationships used with it, this post will be a bit different.

If you are unfamiliar with this blog then you may also want to refer to the "Doc.s on Request" (sidebar to the right) for further 3/10 macd references.

What we know-
  There are two lines on the 3/10 macd; one indicates the difference between two moving averages (3- & 10-period), known as the "Fast Line" (also represented by the histogram) and one which indicates a moving average of that difference (a 16-period moving average of the 3- & 10-period differential) known as the "Slow Line".  Think of it this way:
Slow Line = an intermediate-term trend indication
Fast Line = short-term trend indication.
(as an aside; a Long-term trend indication can be a reasonably reliable Moving Average, like the 50-period, or a 20- & 50-period Moving Average that takes into account the orientation and slope of the two MA's (20- above 50-period and Up is bullish).
  So, the 3/10 MACD provides 2 layers of price; one which directly reflects price (the Fast Line),  and one which is slightly removed from price, being that it's a moving average of the difference between two moving averages (the Slow Line).
The above concepts are slightly less important than the one to follow regarding time frame layers.

Time Frame Layers:
  We learn early on that it is important to understand what higher time frames are doing if we intend to trade a lower time frame.  For the purpose of intraday trading we can not ignore the one chart which is likely studied upon, and made decisions off of the most in our line of work, the Daily chart.  We have to know where we stand in the daily time frame before all else.  In so doing, we should try to keep things simple.  Are we trending or within a range?  Where is likely support/resistance?  With those questions answered we can then approach our intraday analysis.
  My personal preference is for having a 15-min and 5-min chart as an Intermediate and Short-term indication of price.  Trades are taken off of the 5-min chart but only if the other two charts confirm my interpretation of price.  The way in which I like to set screens up is my own, most important is to use what you feel comfortable with.  That being said, my screen for the 3/10 MACD strategy is set up as follows:

   I use a 65-min chart simply because it divides into 390 evenly (the number of minutes in a trading day) and so we have each bar containing the same amount of data.  On this 65-min. chart I have two moving averages and the 3/10 macd set up so that they reflect the DAILY chart.  So, this 65-min chart shows me what it is the 20- & 50-Day moving averages are doing, as well as what the Daily 3/10 indicator is doing.  The other two charts (15-min & 5-min) only contain the 3/10 oscillator, reflective of their individual time frame.

How it works:
  First and foremost I want to know what the Daily chart is telling me.  Is the long-term trend (reasonably reliable Moving Averages) up, down or sideways?  Is the Intermediate-term trend (the Slow Line) up, down, or sideways?  Is the short-term trend (Fast Line) pointing up, down, or sideways?
I'm using the symbol APA simply because that is what opened up when starting my charting program.  So, I'll just stick with my original example from above.
  In the above example it is easy to see that the trend is Up.  We have both the 20- & 50-day Moving Averages sloping up and we have a green (Up) histogram with a slow line above the zero-line and sloping Up.
  Since continuation is more likely than change in trading, I only want to look for long entries when the Daily chart meets the above criteria (bullish Moving Average orientation, Slow & Fast Line above zero).  There are some nuances that will amend the previous sentence, but I'll get into more complex situations later.

Entries:
  OK, so we are bullish on APA because the daily meets the previously explained criteria.  Where do we enter?
  First, we want the Intermediate-term trend (in this case the 15-min chart) to tell us when price is starting to look bullish.  Second, the short-term trend will tell us when to enter (since this IS short-term trading) in anticipation of price continuing on it's already determined bullish course.

  Keep in mind; there are at least two approaches to this strategy; the aggressive (anticipatory) entries and the conservative (confirmed) entries.  Instinct and personal preference will dictate which you follow.  So in the above chart we have two highlighted up arrows on the 15-min chart to tell you when things are looking bullish in terms of the 3/10 oscillator.
Two signals:
  - Fast Line crosses the Slow Line
  - Fast Line crosses the zero-line (histogram changes from negative to positive or from red to green).

  Being that we have a strongly bullish Daily chart we may consider a more aggressive third signal:
  - Fast Line begins to move counter to the previous trend (in the chart above, the middle 15-min chart has an up arrow that is not highlighted.  This up arrow indicates where the 3/10 histogram began to "tick up" and move counter to the previous lower low readings one bar before the fast line crosses above the slow line.
   The reason for this discretionary third signal is due to the fact that the 5-min chart is showing a momentum buy divergence on a double-bottom, and if we can anticipate an early entry our Risk:Reward will be greatly maximized.

  Here's another example, using the SPY.  Again, the higher time frame was bullish (fast line above slow line and above zero), so it was a matter of waiting for the intermediate term to confirm and the traded time frame to signal an entry.

The 15-min chart indicated a bullish bias right at the open (actually showed a bullish divergence on the close of the previous day setting up a buy entry for the next bar) while the 5-min chart was a matter of waiting for the first pullback to enter.

 Now on to some less straightforward examples (though it makes a lot more sense to me to only search for and trade charts that show a straightforward bias ;)

Taking it to the next level
Context:
  Starting with the Daily chart helps to keep everything faster than a daily chart within context.  So, what are the two lines doing on our daily 3/10?  There are a combination of scenarios possible for our 3/10 MACD indicator, and each scenario tells us something about what price is doing (bare with me here):
 We can have the following scenarios:
1). A Positive Slow Line (above zero) trending higher, with:
  (a) a positive Fast Line ticking higher
  (b) a positive Fast line ticking lower
  (c) a negative Fast line ticking lower
  (d) a negative Fast Line ticking higher
2). A positive Slow Line trending Down, with the same set of criteria as above (a through d) for the Fast Line.
3). A negative Slow Line that is trending Up, while the Fast Line meets one of the above criteria (a through d).
  And, finally,
4). A negative Slow Line which is trending Down, while the Fast Line meets one of the aforementioned situations (a through d).
  In all, a total of 16-possible scenarios, and I intend on covering them all (there was a reason this was intended to be my last post on this subject).  I made this spreadsheet to reference (just request viewing permission) so you don't have to scroll back up.

1a.  Positive Slow Line trending Up with a Positive Fast Line ticking higher, like so:

This condition illustrates trend continuation or breakout moves which happen to be MOST dramatic when it is occurring in tandem with a Slow line crossing positive (as was the case in March '10, shown above more closely), they can also indicate short-term tops once the Fast Line begins to tick lower:
 
1b. Positive Slow Line trending higher, with the Fast line positive and ticking lower;  This happens a lot more frequently, and often indicates a mean regression of some sort, or a consolidation phase.  like so:

1c. Positive Slow Line trending Up, with the Fast line negative and ticking Down.
This isn't a frequent occurrence either.  For a similar reason as 1c, typically the Slow Line will be trending down.  Consolidation or pullbacks, but watch for breakouts/breakdowns.

1d. Slow Line positive and trending Up with the Fast Line Negative but trending Up, I don't really see this combination happening since when the fast line is negative trending up the Slow Line will typically be trending down.   So if you see it, you may be in a choppy range.

2a.  A positive Slow Line trending Down with a Positive Fast Line trending Up.  Typical of range expansion or continuation of trend.  Watch for a double top and/or divergence.

2b. A positive Slow Line trending Down with a Positive Fast Line trending Down.   Indicative of range or waning momentum, but watch for breakouts/breakdowns.


2c. A positive Slow Line trending Down with a Negative Fast Line trending Down.  Strong pullback of the previous trend that can lead to a bottoming move.  Look for reverse divergence.  If the slow line is dragged negative a lower high could start a bearish trend.


2d. A positive Slow Line trending Down with a Negative Fast Line trending Up.   Doesn't occur very often (on the daily timeframe), but often indicative of a pullback prior to a continuation of previous momentum. This will often set up criteria 4c where the slow line is dragged negative.  Can lead to the fast line resetting green and trapping shorts.
Notice on the last highlighted rectangle in Nov., price pulled back and moved for a continuation, but then squeezed longs in the morning star pattern that followed, so it technically didn't "work".


 3a. Negative Slow Line trending Up with a Positive Fast Line trending Up.  Could be a pullback of previous momentum, or test of Resistance? Could be a breakout move following a divergence if slow line is near zero. Should momentum carry the Slow line positive, the first pullback is a high expectancy setup long.

3b. Negative Slow Line trending Up with a positive Fast Line trending Down.  Usually highlights a consolidation pullback or test of Support.  Price can drift higher as the momentum wanes. 



3c. Negative Slow Line trending Up with a Negative Fast Line ticking Down.  Didn't find but a handful of these on the past two years of the SPY.  They almost always highlight a divergence or pullback after a momentum move.  Where is Support?
3d. Negative Slow Line trending Up with a Negative Fast Line trending Up.  Another infrequent occurrence (on the daily); infrequent because it's not long before the fast line crosses zero (histogram turns green) setting up a 3a.  If all we can do as a trader is "anticipate" a move then this is a valuable condition to be aware of. 


4a. A Negative Slow Line trending Down with a Positive Fast Line trending Up.  A pullback following an initial impulse move.  The histogram turning green is typically brief.

4b. A Negative Slow Line trending Down with a Positive Fast Line trending Down.  I would clump this one together with 4a. Watch for continuation of previous momentum.

4c. A Negative Slow Line trending Down with a Negative Fast Line trending Down.   Bearish trend continuation.  Trade in the direction of the trend.

4d. A Negative Slow Line trending Down with a Negative Fast Line trending Up.  Pullbacks. Consolidation. Know your range.


So, there you have it!  If we know the context of price we can have a clearer idea of what to anticipate.


8 comments:

Attitude Trader said...

Hey Todd,

Just wanted to thank you for putting in the time and effort to explain this and show examples.

I've used the 14-CCI (a la WoodiesCCIClub) on and off for a lot of years, but never the 3/10 MACD. I noticed right away that the 3/10 fast line tracks very closely with the 14-CCI line, giving some of the same "patterns." But the slow line on the 3/10 gives an extra dimension that is really nice.

I'll be studying this post (and your previous 3/10 posts) for a while.

Thanks again,

-AT

todd said...

AT,
Thanks for stopping by and taking the time to read this mess of a post. If it seems confusing that's b/c it is, I'll be trying to clean it up to make it more reader friendly. Any constructive criticism is welcomed.
I'm not too familiar with the CCI, doesn't it have 2 plots? You'll find this 3/10 isn't much different from any oscillators like the RSI, or stochastic (green histogram means indicates the RSI/Stochastic is above 50-line). While the 3/10 slow line gives trend bias (you'll notice a Slow Line crossing negative tends to precede a 20- 50-MA cross).
Anyway, I suppose I'm a firm believer in having only a select number of tools in my toolbox and learning to use them well.
Thanks again for reading.

Attitude Trader said...

Ha! Anything's confusing until you're able to start figuring it out!

I'll be happy to provide constructive criticism if I'm able to get my head around this, but first I'll probably just have questions.

RE CCI: It only has the one plot line but does use the zero line, +/-100 lines and to a certain extent the +/-200 lines. Trend is usually determined by number of bars above/below zero line.

Here's a trade I just took showing the two indicators together: http://chart.ly/dyacy2k

As far as having "a select number of tools in my toolbox," I'd like to be able to trade without ANY, but until then... :)

-AT

Trader32 said...

Great post Todd. Chick Goslin actually talks a lot in his books about trading where the fast line and slow line are trending together, in conjunction with a moving average. When the three line up it can provide some nice trading conditions.

Trader32

todd said...

Trader32, yes I'm familiar with the book you're speaking of. What I found most helpful in his book is "anticipating" what the indicator will do next and what that means for price. Looking for the most concurrent situations can be very helpful. If interested, check out the spreadsheet I'm in the process of compiling https://spreadsheets.google.com/ccc?key=0AjutPe0-7wpQdGhwN1NTTkd1YUJibE1EU1NxY3l2dlE&hl=en#gid=1

Chris said...

Just want to say thanks for putting this together. This is the most comprehensive summary of the 3/10 oscillator I have found on the web.

Unknown said...

Hey Todd, I know this is an older post, dog days of August I was just searching around on the web on some of my favorite setups and came across this, good stuff man! One of the better examples I have seen.

todd Sohayda said...

Thanks Unknown, much appreciated.