Three Common Tools, One Protocol by Charles K. Langford
Three common tools of technical
analysis can work together to generate
Common technical tools can
be used together to generate
a steady profit flow by using
a single protocol. To examine
how this can be done, the price action
is divided into three time sequences: exhaustion
of a trend, advent, and birth of
the new trend. Among the dozens of tools
available in technical analysis, three represent
this method in a simple way: relative
strength index (RSI), moving average
convergence/divergence (MACD), and exponential
moving average (EMA). Used
correctly, these three tools can generate
Here’s an example using the wheat
market. Figure 1 is of the December 2007
CBOT contract. The daily bar chart shows
two EMAs (seven and 27 periods); the
MACD (7, 27, 7), which I find to work
more efficiently than the usual 12, 26, 9;
and the 14-period RSI.
BIRTH AND DEATH
OF THE UPTREND
An uptrend is born when the two EMAs
give a buy signal. The signal occurs as
the EMA(7) crosses above the EMA(27).
After several attempts, on May 25, 2007,
the EMA(7) crossed above the EMA(27).
The price at the close was 525’0 cents.
This was the birth of an uptrend, and as
time elapsed, it accelerated — that is, the
EMA(27) became more convex. We had
a first peak at 907’0 on September 12,
2007, when the RSI was at 84.18. A
second, and the last in the chart, was at
961’6 on September 28, when the RSI
was at 76.20.