The MACD (Moving Average Convergence/Divergence) is in category
of trend indicators which shows relationship between prices and moving
averages. The MACD was introduced by Gerald Appel, in 1970s. It is
the different between moving averages for 26 and 12 days. MACD as a
momentum indicator can predict the moves in the underlying security.
MACD divergences are basic elements in forecasting a trend alters. A
Negative Divergence signal which bullish momentum is waning and
a change in trend from bullish to bearish is possible, too. It warns the
traders to take benefits in long positions or for violent traders setting off
a short position. Another advantage of MACD is its application in daily,
weekly or monthly charts. In this regard, the divergence and convergence
of two moving averages will be shown by the MACD. Although,
the standard setting defined for the MACD is the difference between
the 12 and 26-period EMA, any combination of moving averages can be
applied. In addition, the set of moving averages to be applied in MACD
can be changed for each individual security. For example, a faster set of
moving averages may be suitable for weekly charts. On the other hand,
slower moving averages may appropriate to help smooth the data for
volatile stocks. Regarding this flexibility, the MACD can be adjusted to
the trading style, risk tolerance and objectives of the traders.
Developed by George C. Lane in the late 1950s, the Stochastic Oscillator
is a momentum indicator that shows the location of the close relative to
the high-low range over a set number of periods. According to an interview
with Lane, the Stochastic Oscillator “doesn’t follow price, it doesn’t
follow volume or anything like that. It follows the speed or the momentum
of price. As a rule, the momentum changes direction before price.”
As such, bullish and bearish divergences in the Stochastic Oscillator can
be used to foreshadow reversals. This was the first, and most important,
signal that Lane identified. Lane also used this oscillator to identify bull
and bear set-ups to anticipate a future reversal. Because the Stochastic
Oscillator is range bound, is also useful for identifying overbought and
oversold levels.
Now, the study using two kinds of technical tool namely MACD and Stochastic
Oscillator. In the study we are going to use 26 days, 12 days EMA
based MACD predictions on 3 top banking companies based on Market
cap on 21 November 2013 and for the same time duration I study Stochastic
Oscillator predictions are also found. After getting signals for
the betterment of the study in the research (Average B, 1S) rule was
applied which means that after getting the chart I choose more than
one buying signal and I average that buy and after I get selling signals.
No short sell is allowed.