Award-winning improvement to MACD

A new paper that deals with the shortcomings of the Moving Average Convergence Divergence indicator (MACD) has won both the CMT Association’s Charles H. Dow Award for outstanding research in technical analysis and the National Association of Active Investment Manager’s Founders Award for advances in active investment management.

Author of the paper, Alex Spiroglou, explains, “My goal was not to simply design yet ‘another’ indicator that would provide approximately the same informational value as numerous ones already do, but to improve an existing tool (MACD), by eliminating its shortcomings. Doing so opens the doors for several pattern recognition opportunities which would not be definable using the classic MACD.”

The Moving Average Convergence Divergence (MADC) indicator was developed by technical analyst Gerald Appel (Jun 2, 1933 – Feb 13, 2020) in the late 1970’s. It is a trend-following momentum indicator that shows the relationship between two moving averages of prices. While a versatile tool with many nonconventional uses, the MADC has five shortcomings:

1. MACD is not time stable (comparable across time),
2. MACD is not comparable across securities,
3. MACD momentum readings cannot be objectively scaled,
4. MACD signal line crossovers are unreliable in low momentum environments,
5. MACD crossover signals are late in high momentum trend reversals.

A solution to deal with shortcomings #1 & #2, is to normalize the readings of the MACD, resulting in an indicator commonly known as the PPO (percent price oscillator). The PPO lacks, however, uniform “high/low” momentum definitions, rendering shortcomings #4 and #5 unsolved and crossover signal filtering not feasible.

Spiroglou’s proposed solution is MACD-V: Volatility Normalised Momentum, by adding Welles Wilder’s Average True Range (ATR) for the measurement of volatility. The improved MACD-V is used to define a general Momentum Lifecycle RoadMap (framework), new entry and exit techniques, and versatile cross asset (intermarket) strategies.

The MACD line formula now becomes: [( 12 bar EMA – 26 bar EMA) / ATR(26)] * 100. The output of the indicator is the amount of momentum a security has that is in excess of its average volatility, expressed as a percentage. “We are measuring directional strength, ‘purified’ from volatility fluctuations,” Spiroglou says.

The paper continues to explore how MACD-V measures against the five shortcomings of the classic MACD and how it might be applied in trading strategies.

To read the full white paper, visit: MACD-V – Volatility Normalised Momentum

The paper is also available on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4099617

 

About Alex Spiroglou, CFTe, DipTA (ATAA)
Alex Spiroglou, CFTe, DipTA (ATAA) is a quasi-systematic, cross-asset proprietary futures trader, currently trading his own book. He is active in all major liquid futures markets and across all major asset classes (equity, interest rates, FX, commodities). Spiroglou has worked with various proprietary trading and investment management firms in the UK and Greece, and holds the “Certified Financial Technician (CFTe)” accreditation by the International Federation of Technical Analysts (IFTA), and the “Diploma of Technical Analysis – DipTA (ATAA)”, administered by the Australian Technical Analysts Association (ATAA). Based in the United Kingdom, he is founder and CEO of SMART Trader Systems Ltd, London, a firm focused on the training, support & development of institutional traders.