Strength MACD Indicator

We all know that trading volume is a very important factor to consider when doing technical analysis.  For example if a stock moves up on high volume, it usually means more upside in the future because there is more market participation.  If stock price moves up on low volume, there is a high chance that the rally has no strength and momentum is not enough to push the stock higher.

A systematic way of using volume is to use a formula devised by Larry William in his book “The Secret Of Selecting Stocks For Immediate And Substantial Gains”.  The concept is to use the Open, High, Low, Close and Volume to calculate a new indicator.  The formula is given below:

    A = (Close-Open)/(High – Low) * Volume

If A is negative, it means that there is net selling for that day.  If A is positive, it means that the market action is positive for that day.    In order to determine the strength of the buying and selling pressure, we can do a cumulative sum of A and to apply the MACD indicator on A.  I will label this as Strength MACD to differentiate it from the normal MACD based on closing price.

Let’s take a look at how this indicator looks for Singtel.

 You can see from the chart that there are less false signals and the buy and sell signal for the Strength MACD usually comes earlier than the normal MACD charts.