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THE 4MACD SYSTEM
BY ROBERT CUMMINGS
There is a time to be long, a time to be short, and a time to go fishing. Jesse Livemore
Technical Analysis: The study of charts utilizing specific price patterns and indicators, in an attempt to
understand future trends or directions of a specific stock.
A chart, utilizing Technical Analysis, is a visual tool designed to tell you what other traders are doing, depicted as
an upward or downward movement of the price and volume. These movements are representing the FEAR AND
GREED OF OTHER TRADERS. The 4MACD SYSTEM has been designed to graphically display other traders'
activity, with the goal of improving the user's probability of making a higher percent of profitable trades on a
consistent basis. To master this system, one will need to look at the patterns given (in relation to any specific
stock), in numerous time frames. This system is stock specific-match the stock to the pattern, analyze what
you see, make a decision based on that which is shown. It is also time specific-match the time frame -4
day to 1 min time bars. Remember, dont force the trade.
The FOUR MACD System introduces the very simple COMBINING OF 4 MACDs into a single indicator-i.e. to be
interrupted as a single indicator in one window. It is designed to show current movements as a positive and
negative image, (green, yellow, or red blue) and MUST be used in conjunction with Bollinger Bands, Price,
Moving Averages, Money Stream, Time Segmented Volume (a better On Balance Volume improvement by Don
Warden), Stochastics and Wilders Relative Strength Indicator. It has a contrarian indicator built into the system-
the RED/BLUE COLUMN. The 4MACD are entered in a specific order for the purpose of producing a graphic
image allowing for easier visualization of the changes that are occurring in the moving averages that predict
direction of price movement. This system was originally designed for the INTRADAY and SWING traders with a
desire to trade either LONG or SHORT. Although designed for the intraday and swing trader, the long-term
investor will also find it useful.
The visual effect is obtained by switching the order of entry values in the MACD. For the negative red blue bars,
the fast average is larger than the long average-opposite of how you normally would enter the values in a MACD.
The green and yellow bars are entered as you normally would-a short fast which is a smaller number than the
slow long number.
The chart is congested with all the indicators. Set up 2 tabs and substitute the Wilder Relative Strength for the
TSV printed over the MACD window to relive some of the congestion. To further help you to understand this
concept, enter each indicator one at a time and review its response to price change in several time frames-9-day
to 1 minute. I would strongly suggest you enter the following settings before reading the rest of this paper. It will
make it much easier to follow the commentary that follows.
Settings:
Top window:
Candlestick price chart: zoom
10 MA ( Blue, wide), Exp
20 MA ( Red, wide), Exp
BOLLINGER BANDS, (Magenta, wide), 7/21
Money Stream (Yellow)
Middle window:
1. MACD, (Blue) Exp, 17/14/7, Histogram Wide
2. MACD, (Red), Exp, 17/8/5, Histogram Wide
3. MACD (Yellow) Exp10/16//5 Histogram Wide
4. MACD, (Green), Exp, 510/5, Histogram
5. TSV (White), Exp, 14, 3 MA of the TSV, (Blue), 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--minor adjustments can be made to match your trading style.
Discussion:
The MACD Histogram negative concept, depicts the negative forces working against the price. It is graphically
shown as the red/blue columns on the chart. Combining this with the positive green and yellow, the 4 MACD
HISTOGRAM become the centerpiece of a trading system. MACD should not be used in a vacuum. Look at all
the indicators in Sync. The yellow and blue act as alerts of change in direction of the moving averages and this in
turn is reflected in the movement of the stock price.
The MACD values are staggered so that price changes will be detected in the green bar (the fast MACD moving
average} exposing yellow (slow moving average of MACD) and the same for the negative red and blue column. It
can be said that the green is bullish indicator and the red is bearish indicator.
As an illustration: think of a traffic light with 4 colored lights. This stoplight has the usual green light with a yellow
caution and the red has a blue caution light. Use this as a graphic aid in the interpretation of a chart. Visualize this
multi-colored MACD, (shown in the middle window), as you would a traffic light while driving down a street. Do
you see a green, yellow or red light? Dependent on the color of the light, do you start changing the momentum,
(speed of movement), of your car, whether accelerating or slowing down? What are the other cars, (indicators),
around you doing? Are they stopping or speeding up. Are they starting to move into your path, possibly causing
you to slow down or stop unexpectedly? (Red MACD and Blue bars). The experiencing of an unexpected gap up
or down in price can be compared to a car hitting you that has run a red light, unexpected and unable to predict.
Think of going short as driving the wrong way on a One Way Street. You know you can make it, and benefit from
your change in direction, if the traffic moving in the opposite direction has currently stopped because of a red
light. When the light changes, and the traffic once again starts moving, it would then benefit you to once again turn
and move with the flow of traffic.
The difference between this example of a street light and that of a changing MACD is that at a glance with the
MACD you can see all facets of the current condition or that of a coming change. You can see the direction of the
current momentum. You can see the initiation of a change; you can then see that change occur as the price and
momentum move in an opposite direction.
The price on the MACD, relative to the centerline, seems to flow in the direction of the green bars. If the Green
bars are shortening but moving from below the centerline in an upward movement, the price should soon follow. If
the Green bars are above the centerline but shortening and moving down; again the price should soon follow. The
yellow tip depicts the change of momentum, or, a need to use caution, before it actually occurs (divergence).
When there is divergence of the price from the MACD, IT IS IMPORTANT TO LOOK TO THE OTHER
INDICATORS FOR GUIDANCE. WHERE IS THE PRICE RELATIVE TO THE BOLLINGER BANDS, IS THE
STOCHASTICS FLAT OR TUNING IN THE DIRECTION OF PRICE AND ACROSS THE 20, 80 LINES, IS THE
TSV CROSSING, WHERE IS PRICE RELATIVE TO THE MOVING AVERAGES? CONFIRMATION,
CONFIRMATION AND MORE CONFIRMATION. For example, if the price is in divergence to the MACD
indicator, the Stochastic will remain flat above or below the 20/80 line.
Look at the chart in several time frames, starting at the weekly and moving down to the one minute. This should
allow you to get a feeling for the trend. You should find this exercise helpful. BASED ON YOUR TRADING
PERSONALITY, be it day trader, swing trader or long term investor; pick the time frame that is best for you and
the stock.
SWING TRADERS--LOOK AT THE 1-HOUR and 30 MIN. CHARTS FOR CLEAN ENTRY AND EXIT POINTS.
YOU WILL FIND IT MUCH BETTER THAN END OF DAY CHARTS IN MANY INSTANCES.
For intraday trades, I personally use the 15 AND 10 minute time frames to find and follow the stock but switch to 1
minute when entering or exiting the trade for the best price. I also use the 30 min and 1 hour in some low volume
stocks. Some stocks will trade better in different time frames. Find the one that you are comfortable with.
Remember, each stock has its own time frame personality. When understood, this time frame personality,
whether yours or that of the stock, will help promote more successful trades.
This analogy may seem corny but it helps to let the colors talk to me. It provides for better timing, whether
entering or exiting the trade. This method allows one to get in earlier as well as stay in longer for more
profits. It will also keep you out of some BAD trades.
An example given by another reader states:
Think of the 4MACD as a traffic light with 4 lenses, in a line along your axis of sight, (green in front and
red at the rear). These lenses all rotate at different speeds, perpendicular to your line of sight. Each lens
has a colored half and a clear half so that its effect is only seen above or below the axis of rotation at any
one time. Unlike an ordinary traffic light, which changes suddenly, this one changes continuously and
gradually. You can sense coming changes by the increasing and decreasing amount of light visible above
or below the axis of rotation.
There is an incredible amount of information and knowledge to be derived from reading the WORDEN NOTES,
daily. This is an accumulation of many peoples desire to achieve the same goal but using a different way and
means to get there.
I encourage you to experiment with different settings when using the FOUR MACD Method. Plot the MACDs as a
line chart and see how it reacts to the price change in different time frames. Using another tab overlay Money
Stream in the price top window for another perspective. Combine the 4 MACD with your other indicators for
greater insight. This exercise will improve your ability to see that which the chart is telling you.
The Trade Setup:
There are three entry/exit points for a trade, the Extremes(oversold and overbought) position of the MACD and
that of a compression switch.(Crossover).
The Ideal Setup is when the columns are at their longest point, either above or below the midline (0) or when the
green flips up above or below the 0 midline, the price is at the top or bottom of the Bollinger Band, the TSV is
crossing its average, preferably at the midline (0), but not necessarily required for a profitable trade, and the
Stochastics moving average should be crossing up above the 20 or moving down across the 80. The WRSI will be
crossing the midline on the MACD BAR at or close to the price reversal.
The exit is just the reverse of the entry setup.
The above 30 minute chart of QLGC has almost everything you will see in a chart -gaps, short trades, and the
long trade. . This is just an example of the color patterns you will see and how the other indicators work to confirm
the trade.
Notice how the WRSI white line crosses the midline on the bar of the MACD, the TSV moving in the direction of
the price, Stochastics crossing and moving above or below the 20/80 line, and the Money Stream changing where
there is price reversal. Conformation, conformation, and more conformation.
For Swing traders:
For high probability trades, look for stocks where the Stochastic has remain flat above the 80 or below the 20 line
for several days and then crosses the line. Look at the MACD to see if it is in an overbought or oversold (Max or
extreme column) and the TSV is crossing its average (is extra strong if moving across the 0 line), and the WRSI
will be approaching or crossing the midline. You can expect a 2-10 day price move up or down. Check it out on
about 40 charts to learn the other indicators in Sync.
ZOOMING and The HIDDEN TRADES:
One weakness of all indicators is they will adjust as more data is collected. With the 4 MACD this is seen in the
chart with the magnitude of the bars. This is important because the success of using the system is to trade from
the maximum oversold and overbought position displayed by the columns. The bars associated with the large
price movement will distort columns following a price spike. Shorter bars that follow display this. For the intraday
trader, this can hide very good trades. To correct for this, you can zoom in, and in some cases shorten the time
frame, to display fewer bars to remove the spiking bars. Many times you will see the shorter bars become longer
indicating a trade can be made.
Gaps:
Most gaps occur at opening. The MACD uses moving averages in its construction. The gap distorts the data for
the first few minutes until more data is collected. There are many books written about trading in the first hour of
the opening and I suggest you study this information carefully. The 4 MACD be very useful dunning this time of
day. This is the only time I will watch a 1-minute chart other than to find an entry or exit price.
After enough data is collected, I will move up to the 5 min and then to the 10 min. chart. Sometime in the first 5-15
min. you will pick up a second reversal or gap filling movement. Find several stocks and look at the 1 min, 5 min,
and 10 min charts for the first 30 minutes of the opening. You will be surprised to see the fast $500 you can pick
up.
TXN and QLGC are good stocks to review. Sometimes you can pick up $1000-$4000 in a day in these stocks with
the 4 MACD.
Conclusion:
The 4 MACD is an excellent tool to use with your own system. Some of my favorite trading patterns I like to trade
are the BB squeeze, the 3-5-price drop, breakouts from consolidation, filling gaps and intraday reversals.
Trade the stock that fits the pattern--DONT FORCE THE TRADE. LOOK AT HOW THE PATTERN/TIME FRAME
HAS WORKED IN THE PAST WITH THE STOCK AND IN WHAT KIND OF MARKET.
CONFIRMATION, CONFIRMATION. CONFIRMATION. WITH PATIENCE TO WAIT FOR THE TRADE TO COME
TO YOU AND DONT FORCE THE TRADE-IF YOU DONT OBEY THIS RULE, YOU WILL BE AN INVESTOR
WAITING FOR THE STOCK TO RECOVER WHICH IT MAY NOT. LOOK AT ALL THE STOCKS THAT WERE
$100, $50 ETC THAT ARE NOW SELLING AT $5-20.
REMEMBER: IF THE TRADE DOES NOT GO THE WAY YOU EXPECTED--CUT YOUR LOSS BY GETTING
OUT FAST.
Happy trading.
Robert Cummings
4 revision 8/12/02
TSV, Time Segmented Volume and MoneyStream
are registered trademarks of Worden Brothers, Inc.