Ch 14 | Taming The Bear

Time to cut through the noise of Chapter 14. We are finally learning to trade the bear, which means a few new terms to learn.

Convergence / Divergence: Simply put, lines moving closer together (convergence) or moving further apart (divergence). Some traders use the term divergence to mean the stock’s price and the indicator are moving in opposite directions.

ITM Bear (ITMB): Our strategy for trading a falling market. It requires daily monitoring when you are actually in a trade, but the results are worth the effort.

MACD (Moving Average Convergence Divergence): An oscillator we use alongside our trusty simple moving averages to trade the bear. It helps measure momentum and exactly how fast a market is moving.

MACD Graph: The 12-day EMA minus the 26-day EMA. It is sometimes confusingly called the signal line. You can usually just hide this line on your charting software.

MACD Histogram: The only part of the MACD we actually care about for the I-T-M Bear strategy. It is a series of vertical bars that oscillate above and below a zero line, and it reacts much faster to price changes than the MACD itself.

MACD Line: The 9-day EMA of the MACD Graph. Again, just hide this to keep your chart easy to read.

Normalization: Scaling an indicator so its absolute values can be directly compared across different stocks. The MACD is not normalized, meaning a $12 stock and a massive $700,000 stock will spit out completely different, uncomparable numbers for the exact same proportional moves.

Oscillator: A group of technical analysis tools that move above and below a central line or between fixed levels. The MACD is an oscillator, but unlike others, it has no fixed limits to confine it.

Threshold (+/- 0.5): The old MACD parameter we historically used to identify genuine downward momentum in SPY. Now that SPY is trading near 700, this old parameter is completely obsolete, which is why we have to update our strategy.