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57 Chapter 18: The Squeeze Our second indicator from the fourth category is Volume-Weighted MACD. MACD is Gerald Appels Moving Average Convergence/Divergence. To our mind, MACD is primarily a trend indicator. It consists of two lines, MACD itself and the signal line. MACD is the difference between two averages, widely known as a departure chart. The signal line is an exponential average of MACD/ To volume-weight MACD you substitute volume-weighted moving averages3 for the exponential averages used in MACD (Figure 18.5). The signal line alone remains an exponential average. Like MFI, VWMACD is a bit more sensitive than its parent, but it doesnt require any adjustment of its parameters for successful use. When volume-weighting MACD, you are asking the question, Does volume support the trend? If it does, then VWMACD will be strong. If it doesnt, VWMACD will nicely highlight the underlying weakness. This concept seems especially important 
Part IV: Bollinger Bands with Indicators when institutional trading is the real driving force behind the market. In this chapter we have presented four volume indicators. To some extent they are noncorrelated. While Accumulation Distribution and Intraday Intensity are both derived from a single periods data, they use very different calculations and variables. MFI is really a volume-imbued momentum indicator, while VWMACD is a volume-weighted trend indicator. Where these indicators agree, they can be treated as one. Where they disagree, one must focus on the story that each tells in relation to its methodology and ferret out the truth. For a more in-depth discussion of volume indicators, please see my paper "Volume Indicators" (see the Bibliography). Now we turn to the next two chapters for a couple of practical applications. KEY POINTS TO REMEMBER Volume is an independent variable. Volume indicators may be categorized by calculation type. Focus on AD, II, MFI, and VWMACD. Look at both open and closed forms of AD and II.
CHAPTER METHOD II: TREND FOLLOWING Method II anticipates the birth of trends by looking at strength in price confirmed by indicator strength. The idea is that when price is sufficiently strong to approach the upper band, and that strength is echoed by strength in an appropriate indicator, we may anticipate the beginning of an uptrend (Figure 19.1). Of course, the opposite is true as well (Figure 19.2). In essence, this is a variation on Method I, with the indicator MFI being used for confirmation and no requirement for a Squeeze. This method may anticipate some Method I signals. Well use the same exit techniques, a modified version of Parabolic or a tag of the Bollinger Band on the opposite side of the trade. The idea is that both %b for price and MFI must rise above our threshold. The basic rule is, if %b is greater than 0.8 and MFI(IO) is greater than 80, then buy. Recall that %b shows us where we are within the bands; at 1 we are at the upper band, and at 0 we are at the lower band.
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