This week I'm introducing a new indicator I developed a few days ago and have shown in the various trading rooms; the Volume MACD. What is the Volume MACD?
It's an indicator that is coded to resemble a regular MACD but instead of measuring price like a regular MACD this indicator will be measuring volume.
Before I introduce the Volume MACD, let’s take a minute to review what the MACD is and how it works. The MACD is a multipurpose study that shows changes in direction, strength, momentum and duration of a trend in price. This new MACD does all of that but with volume!
The MACD is an unbounded oscillator calculated from price data. As a result, we need to look at where this data comes from. There are three series of price data used to develop the MACD.
They are plugged in by using an Exponential Moving Average (EMA) formula. If you have not yet reviewed how a moving average is calculated, you can review that blog post here.
The MACD is a trend following and momentum measuring indicator. The best of both worlds! How is the MACD developed? The MACD value is developed by converting the EMA’s into an oscillator.
This is done by subtracting the longer moving average (26 EMA) by the shorter moving average (12 EMA) (called the Value Line). Then calculating a moving average from that difference (called the Avg Line).
The Primary Trend Divider is the Zero Line and the MACD crosses above and below this line as the moving averages converge, diverge, and cross. This crossover is the trend change confirmation signal.
For the trader who relies on confirmation trading signals, a MACD crossover of the Zero Line is considered a primary signal that the trend has officially changed. The MACD is considered a Trend Following indicator because it's an indicator that looks backwards and confirms a trend already in motion.
Another issue some traders have the MACD is not offering overbought and oversold signals. This occurs because is the MACD is unbounded. Hence why I've developed the Volume MACD indicator.
A Bullish Crossover (Buy signal) is given when the Value Line crosses above the Avg Line. A Bearish Crossover (Sell Signal) is given when the Value Line crosses below the Avg Line. These events are taken as signals that the trend is accelerating in the direction of the crossover. Make sure to keep an eye on this when trading low float stocks.
As the picture below shows, the MACD line is called the Value Line, the MACD Average is called the Avg Line, and the Zero Line is called the Zero Line.
These names are important to understand since I developed the Volume MACD to reflect the same type of User Dialog Box settings.
Now that we've reviewed the MACD let's take a look at the Volume MACD that I developed. The User Dialog Boxes are identical. As a result the Value, Avg, & Diff lines are the same for each of these MACD’s.
When a trader is looking at volume, the values don't reflect actionable information. Typical volume bars fail to offer actionable data.
Even if we apply a label to calculate percentage values above or below the “normal” volume, this does not give us data useful enough to place a trade with any edge.
Look at the picture below and understand how volume came before the price move, but not with an actionable signal (watch us do trading live each day in our trade rooms).
This is the very reason I decided to create a study which measures volume. When I decided to measure volume, I wanted to have a tool that could show me momentum and trend.
With Volume MACD, we now have a tool that can identify when volume momentum is increasing. This can signal when the trending volume has changed direction. Look below at the same price action, with the Volume MACD study added.
Volume MACD gives us crossover signals easily identifying when volume momentum is increasing. This offers us the ability to recognize a trending market before a move occurs.
I want to share some final thoughts. The MACD is a great study that can provide valuable and actionable stock market trading information across multiple time frames.
The Volume MACD can provide that same valuable data earlier than a regular MACD because volume changes come before price changes. However, learning how to develop actionable trading strategies based on a new study is not easy.
This Volume MACD is totally different than anything I've ever used in trading. The early identification of volume changes come a lot sooner than anything I've ever used before.
Please make sure you take the time to become familiar with this study before placing trades based on the signals given. Our trading service is all about study and practice before diving in.
ThinkorSwim link for the Volume MACD study: http://tos.mx/zlPnuE
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