Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator thereby becoming less sensitive to noise.

The primary benefit of MACD is that it incorporates aspects of both momentum and trend in one indicator. As a trend-following indicator, it will not be wrong for very long. The use of MA ensures that the indicator will eventually follow the movements of the underlying security. By using EMAs, as opposed to SMAs, some of the lag has been taken out.

The MACD Formula

The formula is very simple. The following is the formula for calculating the MACD (Moving Average Convergence Divergence):

MACDt = EMA1 - EMA2EMA1 and EMA2 are exponential moving averages at period t with different smoothing factors.

To be continued.

Usage
Trading Term

Context
Answers questions: What does stop loss mean? Define Stop Loss. What is stop loss used for in trading?

Definition of Stop Loss

Stop loss is an action, manual or automatic, to buy or sell a security that has passed a limit set beforehand. This is typically done automatically. Many if not most brokerages in the market today offers stop loss orders. When the security reaches its stop price, the stop order made with the brokerage is entered as a market or a limit order for the preset price.

The limit order is usually set to a price below the trigger price (the price of the security that triggered the stop loss).

Example:

• We enter long (buy) security A at the price of 100.
• At the same time, we place a stop loss order at 96, to sell at 95.
• If the security reaches 96, an order to sell security A at 95 immediately hits the market, usually ensuring a successful sell of Security A.

The idea behind stop loss is to ensure that you don’t follow a loosing trade to the bottom. The drawback with stop loss is that if you are not an active trader, and if the market is in a bull market, you will inevitably lose money since not moving into a position fast enough will make you lose out on the re-bound.

Another drawback or risk with stop loss is to set it to tight, then missing out on the rally that was just around the corner.

Stop loss is greatly appreciated and gets a lot of ravings in literature. In reality, with a near 15 year bull market, for not-so-active traders, but rather private savings investors, a stop loss insurance on your order may only prove to be another way to lose money at both commissions and being stopped out just before the re-bound.

NOTE! This article does not take a stand on how you should act in any particular trade. Be aware of the risks with stop loss.

Usage
Financial Institution, Financial Term, Money Markets, Currency Exchange, Trading Term

Context
Answers questions: What does FOREXT mean? Define FOREX. Explain what FOREX stand for. What is FOREX?

Definition of FOREX

FOREX is a commonly used term to describe the foreign exchange market. The foreign exhange market does not exist in the sense that there’s one exchange per country or region. It exists globally without central regulations. Institutional brokerage firms trade amongst themselves and can act as intermediary between themselves and retail traders.

FOREX is losley used as a description of “trading with currencies” e.g. “I have moved into FOREX now” would thus mean that the person has started traded with currencies.

Generally percieved as very high risk market for individual (retail) traders.

The foreign exchange market is made up of 98% of institutional trades, and only 2% retail according to Wikipedia.

Usage
Financial Institutions, Financial Term

Context
Answers questions: What does broker mean? Define Broker. Explain what a broker does. What is a broker? What does a broker do?

Definition of Broker

Broker is someone who acts as intermediary between a buyer and a seller of a commodity or security.

The evereyday meaning of the word broker is usually referring to a financial institution or someone working at, or affiliated with a financial institution - a brokerage firm.

Broker is often used as synonym to brokerage firm e.g. “My broker is really good” doesn’t necessarily mean that the person has got a personal broker from a brokerage firm, rather that the firm or the online representation of the firm is to his/her liking.

This is a walkthrough on how to calculate it manually which also adds to the understanding on how it works.

In this example we shall calculate EMA for a the price of a stock. We want a 22 day EMA which is a common enough time frame for a long EMA.

The formula for calculating EMA is as follows:

EMA = Price(t) * k + EMA(y) * (1 - k)

t = today, y = yesterday, N = number of days in EMA, k = 2/(N+1)

Use the following steps to calculate a 22 day EMA:

1. Start by calculating k for the given timeframe.
   2 / (22 + 1) = 0,0869
2. Add the closing prices for the first 22 days together and divide them by 22.
3. You’re now ready to start getting the first EMA day by taking the following day’s (day 23) closing price multiplied by k, then multiply the previous day’s moving average by (1-k) and add the two.
4. Do step 3 over and over for each day that follows to get the full range of EMA.

This can of course be put into Excel or some other spreadsheet software to make the process of calculating EMA semi-automatic.

To give you an algorithmic view on how this can be accomplished, see below.

public float CalculateEMA(float todaysPrice, float numberOfDays, float EMAYesterday){
   float k = 2 / (numberOfDays + 1);
   return todaysPrice * k + EMAYesterday * (1 - k);
}

This method would typically be called from a loop through your data, looking something like this:

foreach (DailyRecord sdr in DataRecords){
   //call the EMA calculation
   ema = Formulas.EMA(sdr.Close, numberOfDays, yesterdayEMA);

   //put the calculated ema in an array
   m_emaSeries.Items.Add(sdr.TradingDate, ema);
 
  //make sure yesterdayEMA gets filled with the EMA we used this time around
   yesterdayEMA = ema;
}

Note that this is psuedo code. You would typically need to send the yesterday CLOSE value as yesterdayEMA until the yesterdayEMA is calculated from today’s EMA. That’s happening only after the loop has run more days than the number of days you have calculated your EMA for.

For a 22 day EMA, it’s only on the 23 time in the loop and thereafter that the yesterdayEMA = ema is valid. This is no big deal, since you will need data from at least 100 trading days for a 22 day EMA to be valid.

Usage
Technical Indicator, Technical Analysis, Trading Software, Trading Tools

Context
Answers questions: What is exponential moving average? Define EMA, define exponential moving average, Explain the technical indicator exponential moving average.

Definition of Exponential Moving Average (EMA)

Exponential Moving Average shows the average value of the underlying data, most often the price of a security, for a given time period, attributing more weight to the latest changes and less to the changes that lie further away.

Exponential Moving average is together with its simple counterpart (MA) considered to be one of the most common Indicators in nearly any technical analysis software available in the market today. It’s a trend following indicator and is calculated like so:

EMA = Price(t) * k + EMA(y) * (1 - k)

t = today, y = yesterday, N = number of days in EMA, k = 2/(N+1)

For a complete walkthrough of how to calculate an EMA, see our EMA-walkthrough.

Exponential Moving Average is a trend following indicator.

Usage
Technical Indicator, Technical Analysis, Trading Software, Trading Tools

Context
Answers questions: What is a moving average? Define moving average, Explain the technical indicator moving average.

Definition of Moving Average

Moving Average shows the average value of the underlying data, most often the price of a security, for a given time period.

Moving average is considered to be one of the most common Indicators in nearly any technical analysis software available in the market today. It’s a trend following indicator and is calculated like so:

(P1 + P2 + … + Pn)/N

P = price
N = the number of days to use

There exist different types of Moving Averages, where Simple Moving Average is a straight average calculation. Exponential Moving Average and sometimes Weighted Moving Average have come to replace the importance of simple moving average in technical analysis.

The biggest critique against Simple Moving Average as trend indicator is its rough-cut and somewhat crude changes from day to day that comes from moving up when a low-price day is dropped, and moving down when a high-price day is dropped from the series. This may cause an erroneous reflection of the market events.

Exponential Moving Average renders a more smooth transition than its simple counterpart.

Usage
Trading Strategies, Technichal Analysis, Trading term, Trading Software, Trading Tools

Context
Answers questions: What does buy-and-hold mean? Define buy-and-hold as a trading strategy. Explain the strategy buy-and-hold.

Definition of Buy-And-Hold

Buy-And-Hold is a common label of the simplest trading strategy available; buying a security and holding on to it without trying to sell for quick profits and the re-buying at a lower price.

Most private savings strategies can be said to be buy-and-hold strategies.

The term is mostly used in combination with trying out trading systems using some kind of technical analysis software.

Usage
Technichal Analysis, Trading term, Trading Software, Trading Tools

Context
Answers questions: What does system trading mean? Define system trading. Explain system trading.

Definition of System Trading

System Trading refers to the activity of buying or selling securities based on indications from a set of rules, often referred to as Indicators or Formulas, put together into a Trading System.

In one sentence: When a trader lets a number of preset rules determine the actions to take in the market.

There exist a number of development platforms (technichal analysis software) to automate system trading.

Usage
Technichal Analysis, Trading Software, Trading Tools

Context
Answers questions: What does back testing mean? Define back testing. When should I do back testing? Explain back testing.

Definition of Back Testing

Back testing refers to the activity of testing an Indicator or Trading System on historical prise and/or volume data of a security.

Back testing is done in order to see how accurate the tested trading system or indicator gives profitable signals of buy and sell for the underlying security. It’s very common to compare the outcome to other trading systems or simply against a buy-and-hold position.

There are a number of back testing platforms (technichal analysis software) available in the market today.