MACD – Moving Average Convergence DivergenceThe following combinations of parameters were used to study MACD for HDFC bank.

Combination Description Outcome Suggested action

Combination 1Simple moving average with price (MA26 Vs Price)

Reasonable accuracy No action suggested

Combination 2Simple moving averages (MA26 Vs MA50)

Delayed response (could not predict price trends) Buy

Combination 3Simple moving averages (MA26 Vs MA12)

Delayed response of cross-overs but convergence-divergence might predict

Buy

Combination 4Exponential moving averages (MACD: EMA12-EMA26, Signal Line: EMA9)

Good predictabilityBuy

Combination 1:

Software/Website used: ChartinkMACD – MA26 (moving avg) against stock prices

The graph below comprises of data past 2013. It clearly shows that MA26 with the price line indicates trends at cross-over points. However in the boxed area owing to frequent cross-overs, prediction of trends is difficult.

Combination 2:

Software/Website used: ChartinkMACD – MA26 Vs MA50 (moving avg)At all cross-over points, there has been a clear indication of trends. However certain cross-over points appeared late (could not predict the price – refer figure below)Also when MA26 begins to diverge from MA50, the stock surges as per data from past two years.

Combination 3:

Software/Website used: ChartinkMACD – MA26 Vs MA12 (moving avg)The cross-over points seem to give delayed information. However, if convergence & divergence are monitored using histograms, this combination might give better results. Hence in combination 4, we have plotted convergence & divergence (difference between 2 moving averages).

Cross-over occurred after stock price surged

Combination 4:

Software/Website used: BSE – MS SilverlightMACD Line – EMA26 & EMA12 (Exponential)Signal Line – EMA9 (Exponential)

An overview of this combination shows that the combination provides reasonable amount of accuracy. Events have been described as below. As simple moving averages did not yield good results, exponential moving averages were used.

Back testing of combination 4:

Upon back testing on data past 2013, the results are as follows,

Zero Line – Whenever the zero line is crossed by MACD (marked by yellow vertical lines), we notice the variations price trends. These points of MACD have been highlighted below. It is observed that when the downward (upward) movement across the zero line is sustained, there is a drop (rise) in

Stock Price

Volume

MACD Vs Signal Line

price. There are a few points which don’t satisfy this criteria, however, in these cases, the movement after zero-crossing did not sustain (marked by grey vertical lines).

Cross-over Points – Whenever the MACD line and signal line cross-over, a change in trend is observed. Some of them have been highlighted below. In most of the cases below, a cross-over between MACD & signal line has happened along with a peak or trough in MACD. In situations when both the indicators appear consequently, a clear reversal of trend can be predicted.

Stock Price

Volume

MACD Vs Signal Line

Stock Price

Volume

MACD Vs Signal Line