How to Improve the Use of MACD with One Simple New Indicator
Professional technical traders are preparing for the new regulations that will alter how the Buy Side and Sell Side Institutions trade stocks and options. The changes to the market structure to accommodate the new compliance rules that govern how the Institutions invest and trade are expected to alter technical patterns significantly. Already, the use of new order systems in Dark Pools and Twilight Pools is changing how professional technical traders trade.
To keep up with the changes to technical patterns, traders must learn to adapt and modify their current indicators used for analysis. Most technical traders use MACD, Bollinger Bands, or Stochastic. These price-based indicators, however, need to be augmented with Dark Pool Tracking Indicators to optimize stock chart analysis.
The Institutional Investors use Dark Pools or Twilight Pools through which they are able to use orders that are time-weighted at specific price ranges (TWAP) and which trigger automatically over time. This is a crucial difference between the giant Dark Pools and the orders of smaller funds, which use volume-weighted at price (VWAP) strategies that have them chasing the extreme volume spikes of High-frequency trading. To track where Dark Pools are buying or selling incrementally over several weeks to several months requires more sophisticated stock trend analysis and indicators than were necessary in prior decades.
It used to be that price and time indicators were the most powerful and dominant indicators, but unfortunately, that is no longer the case. Now with most of the market activity automated, and with the unique order types from Dark and Twilight Pools, it has become far more imperative to use quantity-based indicators alongside your price-based indicators.
Here is a good example of the problem faced by traders who only use price and time indicators such as MACD, which is a price momentum indicator.
The intent of Dark Pool trading is not to disturb price and volume, so these large-lot buyers purchase their large quantities of stock over a several-week to several-month period of time. They stretch out the buying phase by using automated orders that trigger on a controlled price range with incremental buying on days when the markets are quieter with less activity on the major indexes.
MACD frequently triggers false buy signal entries or false sell signal entries due to how the Dark Pools control price. Since they are buying incrementally over many weeks, they control their volume too so that it never surges hugely or moves price. In fact, Dark Pools rarely disturb price.
HFTs, on the other hand, cause the huge spikes in volume and price that we see frequently, especially in big-name stocks that are components of the major indexes. But after their one-day events, price tends to slip downward. MACD lags in most instances, which means technical traders miss out on the best momentum runs or take less of the momentum run profits.
At the most critical price action levels, MACD lags or gives a false signal. This is due to how Dark Pools control price. With tighter price movement before breakouts, it is crucial to enter before the gap or momentum run. MACD signals after price momentum action, which gets the trader in late or has them exiting early.
With Dark Pool tracking indicators based large lots versus small lots, it is easy to identify the earliest periods of quiet accumulation, even while there is no momentum in the price action. This gives technical traders advance notice that momentum energy is building even while the price movement is tight and not going anywhere for a time. With large-lot versus small-lot indicators, a technical trader can anticipate and prepare in advance for momentum action, thereby entering before price moves and ahead of the HFTs.
Balance of Power is an example of a large-lot indicator that exposes when the Dark Pools are active in specific chart patterns. When such modern indicators are employed along with the traditional price indicators such as MACD, Stochastic, or Bollinger Bands, a technical trader can see where the Dark Pools are trading and enter well ahead of the HFT action that always follows the Dark Pools. The increase in profits can be significant and is well worth the time needed to learn how to use these newer indicators.
Learning to use Dark Pool tracking indicators, also known as large-lot or accumulation/distribution indicators, along with price indicators like MACD is a huge benefit to all technical traders. The combination of MACD with these newer indicators will streamline the analysis and eliminate the false-signal problems associated with MACD and many other indicators that use only price data in their formulas.
- Martha Stokes, CMT
Martha Stokes, CMT is a retired fund manager, Chartered Market Technician and CEO/Instructor at TechniTrader, a trading and investing Education Company.
Website: http://technitrader.com/
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