Moving Average Convergence/Divergence (MACD) Trading SystemsAs discussed above, there are two main ways of using the MACD indicator in a trading system--to gauge trend and "momentum" though the latter might be better called acceleration in this context. The first way of trading MACD 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 0.1This system is not profitable on average, and is characterized by many small losers (about 76% of the trades. The system does keep drawdowns fairly low at only 2.3% on average.
A second way MACD is used, is to base trading in the direction of momentum according to MADC crossovers as in 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 0.1This 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 appear to be insufficient for actual trading. It may be possible however to use the MACD indicator productively in combination with other signals.
Contents: A View on Technical Indicators and Trading Systems
- Common Technical Indicators and Interpretations
- Moving Averages of Closing Prices
- Wilder's Relative Strength Index (RSI)
- Moving Average Convergence/Divergence (MACD)
- Two Technical Indicator Scoring Techniques
- Predictive Value of Technical Scores
- Simple Trading System Performance
- Moving Average Crossover Trading Systems
- MACD Trading Systems
- RSI Trading Systems
- Systems Using the Traditional and Statistical Scores