The Strategic Trader
Detailed Strategy Evaluation

Monthly Archives: April 2011

MACD Part 1: Zero Line (Long Only)

In this series we will test the MACD (Moving Average Convergence Divergence) indicator. Like our other indicator series we will test the results against our 5-minute base line results found here: Long Baseline, Short Baseline, and Risk/Reward Baseline

MACD is commonly used to enter trades based on its position relative to the Zero Line. Our first test will enter long whenever MACD is above the zero line.

Results: Exit at 5 Bars
These results turned out very similar to what we saw with RSI when above 50. Very few combinations were even positive with no results coming close to demonstrating a tradeable edge.

Results: Exit Using 1:2 Risk/Reward Ratio
Not a single combination resulted in a net profit. Clearly it is not wise to buy when MACD is above the Zero Line.

Now we will test the MACD below the Zero Line. Based on the above results, we expect being below the Zero Line to outperform.

Results: Exit at 5 Bars
No combination was able to surpass our targets for total profit. However, a large number of combinations surpassed our percent profitable threshold. This indicates a potential edge, however the edge is likely too small to surpass trading costs such as commission. May be useful as a filter to filter out losing trades.

Best Combination: Fast = 2, Slow =4 Smooth =4

Results: Exit Using 1:2 Risk/Reward Ratio
No combination came close to our thresholds. This combined with the failure to reach profit thresholds using 5 bar exit, further underscores this strategy as containing a very weak if any edge.

Summary
There may be a slight edge when entering trades while below the Zero Line. However, by itself it is not tradeable. In future articles we will look at ways of using this filter to improve our overall edge.

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