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Moving Average Convergence/Divergence (MACD) Trading Systems

As discussed above, there are two main ways of using the MACD indicator in a trading system--to gauge trend and momentum. The first leads to the following system:

System 5: Buy when MACD crosses above 0, Sell when MACD crosses below 0 

Avg profit per trade (% gross)            0.3
Avg days held                            28.3
Profitable trades (%)*                   24.1

Avg drawdown (%)                          2.3
Max drawdown (%)                         25.2
Avg profit/avg drawdown                   0.1
This system is not profitable on average, and is characterized by many small losers (a out 76% of the trades. The system does keep drawdowns fairly low at only 2.3% on average.

Basing trading in the direction of momentum using MADC crossovers yields the following system.

System 6: Buy when MACD crosses over its signal line, Sell when MACD crosses below its signal line 

Avg profit per trade (% gross)            0.2
Avg days held                            14.5
Profitable trades (%)*                   30.1

Avg drawdown (%)                          2.2
Max drawdown (%)                         53.2
Avg profit/avg drawdown                   0.1
This system is also unprofitable. Note that it trades faster than the one above, and 30% of the trades are profitable. It has a similar average drawdown as the prior MACD system. Thus the simple trend/momentum following systems illustrated here are insufficient for actual trading.

Continue to part 7 - "Relative Strength Index - RSI Trading Systems"

Contents: A View on Technical Indicators and Trading Systems