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The Worden Report (Friday, August 16, 2002)
We Dub Thee Sir Bob
Sir Bob has come to us very differently than any other knight. He was sponsored by various members of the Tweaker Club in TCNet, who approached us on his behalf. The Tweakers swear by his original approach the Cummings 4-MACD system -- which reportedly has led to profits for many of the clan. This is the first time we have ever appended a persons name to an indicator or a system as a part of knighthood, and it will probably be the last. This is an exceptional situation in that the approach had already been presented to a sizable number of traders, and the Cummings name had already been incorporated in the name. He chose his own name, Bob, for the knighthood, and submitted the following, which is presented in the form of a letter to his children. We welcome Sir Bob to the Roundtable of Knights Who Think for Themselves. The celebratory bottle of Veuve Clicquot Ponsardin will be dispatched with all due haste. -DW
8/11/02
Dear Don:
As a long time subscriber to TC2000 and now the TCNet, I appreciate your familys efforts in developing this necessary tool for investors survival in this current market.
In keeping with the family spirit of your investment tool, I set out to design a strategy for my family to enhance their trading skills and enable my children and grandchildren to take control of their own portfolios. The strategy I developed had to be simple. It had to complement other indicators and, most importantly, it had to produce a high probability of a successful trade Ive spent most of my life identifying problems in the medical field and then finding simple, commercially successful solutions by altering and applying existing knowledge. I have basically stood on the shoulders of giants. Again, I am standing on the shoulders of giants with this system as I alter others knowledge into a product for my children, their families, and my friends.
Dear Children:
This is the Cummings 4 MACD system I designed for you and your family. I wanted to reduce it to writing to make sure the information is available for everyone to study. With experience, the grandchildren could trade their way through college if it became necessary. It is simple and graphic for reviewing your stocks to find the best entry and exit points. Once mastered, you will have a greater probability of a profitable trade. Not only will you be able to stay in the trade longer with greater safety and more profit, it will also keep you out of some bad trades.
It has been tested under fire by many TCNet users in the Tweaker Club. Their feedback has helped to fine-tune it for use in this demoralizing market.
Here are the indicators used in the Cummings 4 MACD system.
EMA---Exponential Moving Average
BBBollinger Band
TSVTime Segmented Volume (Worden Bros)
MSMoney Stream (Worden Bros)
StochStochastic
WRSIWilders Relative Strength
Settings:
Top window:
1. Candlestick price chart: zoom
2. 10 MA (Blue, wide), Exp
3. 20 MA (Red, wide), Exp
4. BOLLINGER BANDS, (White, wide), 7/18
5. Money Stream (Yellow)
Middle window:
1. MACD, (Blue) Exp, 17/14/5, Histogram Wide
2. MACD, (Red), Exp, 17/8/5, Histogram Wide
3. MACD (Yellow) Exp10/16/5 Histogram Wide
4. MACD, (Green), Exp, 5/10/5 Histogram Wide
5. TSV (Red), Exp, 15, 3 MA of the TSV, (Cyan), Exp, 3 day both wide lines.
6. WRSI 6/3 (White) with a 3 MA Exp. (Magenta)
Bottom window:
Stochastics,
Period, 17
SK, (Cyan), 3
SD, (Red), 3
These setting are not holy. In fact the middle window may become too congested. To handle this problem, create another tab substituting the WRSI for the TSV. I encourage you to experiment with the settings and improve them--just learn to think for yourself. This is the starting point.
Discussion:
The MACD is the difference between two moving averages plotted against a moving average of that number. This information can be graphically displayed as a line chart or a histogram plotted against a 0 midline. The normal interpretation for a trade signal is when the two lines cross or when the histogram moves from one side of the 0 line to the other. The price is going up when it crosses up above the 0 line and the price is going down when it crosses below the 0 line.
The problem with the single MACD is the magnitude can change as new data is collected and the current column becomes shorter and a new longer column appears. You are left with the question is this the reversal point are will the columns just keep adjusting themselves as the price falls or goes up? The 4 MACD that I have designed for you helps to clarify this question. It reduces the effect of this back adjusting but does not eliminate it--all indicators have this problem
The centerpiece is the graphic positive and negative MACD. The negative (Red/Blue) MACD is achieved by reversing the normal order of the LONG and SHORT MACD settings. That is, the short value will be greater than the long value. The positive MACD (Green/Yellow) is entered in the standard manner. Notice that the input numbers are staggered to reveal subtle price movements.
The 4MACD must be used with the other indicators. Confirmation, Confirmation, Confirmation is the key.
I suggest you print this paper and enter the settings in the order that I have listed before going any further. Add one indicator at a time and observe the effect that price has on it in different time frames. Building the chart in this manner will make for better understanding of the information that follows.
As a quick overview before going into more details, bring up TXN as a 9-day chart. Notice the movement of the green and red MACD columns as they expand and contract with the price.
A stock is said to be overbought when the Green column of the MACD is at its maximum above the 0 midline. An oversold stock is when the Red column is at its maximum above the 0 midline. A divergence in price is said to have occurred when the price continues to go up or down-- opposite to what the MACD is indicating.
The MACD is most effective in trending stocks and is useful in finding and trading reversals, breakouts, and divergences.
The 4 MACD has 3 major entry/exit points: (1) at the max oversold, (2) at the max overbought, and (3) when the Red or Green column moves across the 0 line following a divergence. There is other entry /exit points, but these 3 are the best for high probability of success. Naturally, if it is an entry point, then it is also an exit point if you already own the stock. While I designed this for swing trades lasting a few days and for intraday trading, it can be used on the longer period trades. You must use all the information from all the indictors to make a profitable trade...
An entry into a long trade is indicated as follows:
The stock will be in an oversold condition (green MACD is max below the 0)
The price will be coming off the bottom BB (Bollinger Band)
Money Stream should be turned up.
The TSV (Time Segmented Volume) will be trying to cross up above its EMA (Exponential Moving Average). If the TSV is also crossing the 0 midline, it is a very strong indication that the price will move up. Review Peter Wordens CD on TSV for more information. It is not required to be crossing the midline to make a trade, but it must have crossed its EMA and turning up.
The Stochastic will have crossed its EMA and moving above the 20 line.
Now look for the Yellow and Blue tips to appear on the Green and Red columns respectively.
A SHORT trade is made just opposite to the above trade, i.e., the max green column will start the trade above the 0 line and move down to below the line.
In a divergence, the price will move in the opposite direction of MACD indicators. The Stochastics will remain flat above or below the 20/80 lines. The columns will compress until the colors flip at the 0 line and the stochastic will have crossed the 20/80 line. That is the reversal point.
Lets talk about those yellow and blue tips. That is what makes the 4 MACD different from all other systems using the MACD. The simplest way is to think of the 4 MACD as a traffic light. Green to go, red to stop, and the yellow and blue as caution lights. The price follows the green except for divergences when the price moves in the opposite direction of the MACD indicator.
Regardless of the time frame you decide to trade, look at the stock in very time frame--9 days to 1 minute. Watch how the 4 MACD and the other indicators react to the price. Pay close attention to the 1-day chart and then look at the 1 hour and 30 minute charts if you are going to hold the trade for overnight or longer. Many times you will need to see the 1 hour or 30 minute charts to give you the necessary information to swing trade.
As an example, go to TXN. Daily Chart (each bar =1 day) Zoom 6. Look at May 16, 2002. You will see the first alertYellow tip on the Green. Now look at the other indicators. The price is at the top of the BB and bumping the 20 EMA, TSV is trying to cross its average down, and the Stochastic is above the 80 line and trying to move down. The WRSI is moving across the midline.
On MAY 17, another Yellow tip on the Green and now there is a Blue tip on the Red below the0 line. All the other indicators are confirming the rollover. You could have gone SHORT. The price walked down the BB and the green continued down and moved below the 0 line. Notice how all the indicators worked together. This is a classic move.
The exit: Depending on your trading personality--you could have used the 10 EMA as resistance and closed out at about 26---a 6-point move. Notice how the Green went from the very top, to the bottom. Look at how the Red/Blue reacts to the dropping price. See how the Green and Red columns expand, contract, and move from top to bottom with the price changes.
Use TXN, TYC, and FRED as good training charts to see the different patterns. Using the 4 MACD, go back and look at your last 5 trades and see if the 4 MACD would have helped--check several time frames.
BASIC RULES:
If you see Yellow or Blue be cautious.
Every stock has a trading time frame personality; you have a trading personality-- match them up for successful trading.
If chart appears ambiguous go find another stock to trade
If the trade does not go the way expected, close the trade.
The intraday trade with different time frames will also produce different Yellow Blue signals. For example most of the time you will get two yellow and a blue on the 15 min., but on the five minute a yellow and blue will appear most times on the first bar of the price reversal.
To master this colorful 4 MACD indicator working with the other indictors, you will have to study hundreds of charts in all time frames until it becomes as automatic as driving a car. Use this to filter you holdings and to review, and the stocks from various scans. Just look for the stocks that are overbought or oversold and match them with the other indicators for the highest probability of profitable trades.
Happy trading, Dad
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