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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" 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                   0.1
This 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                   0.1
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 appear to be insufficient for actual trading. It may be possible however to use the MACD indicator productively in combination with other signals.

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

Contents: A View on Technical Indicators and Trading Systems