The popular MACD indicator results in a poor success rate of 32.14% for the Dow 30 stocks and 32.73% for the individually tested NASDAQ-100 stocks over a 10-year period. However, the derived MACDR2 model, which is slightly positively correlated to the volatility of the stock, results in a good, out-of-sample tested, trading performance.

The most successful version of the model MACDR2, which exploits only high degrees of crossing of the MACD1 and Signal indicator, results in a success rate of 89.39%. The average profit of the 89.39% successful trades is 6.83%. Since the holding period of method MACDR2 is on average only several days, the trading results can be enhanced with option trading. The risk-adjusted Sharpe ratio of option trading increases for most levels of implied volatility, which have occurred in the past. However, using the high implied volatilities of April and December 2000, the Sharpe ratio of trading options is lower than the Sharpe ratio of trading the underlying stocks.

Testing different moving averages than the market standard 26, 12 and 9-day average does not improve the trading results of the traditional MACD indicator. However the success rate of method MACDR2 is slightly positively correlated to the time period of the moving average. A 90.74% success rate is achieved for the moving average combination 77, 34 and 25. Comparing method MACDR2 with a benchmark of holding a riskless asset, the Treasury bond and the underlying asset, the NASDAQ-100, we find that most versions of methods MACR2 can outperform these benchmarks.

Therefore, this study provides evidence against the random walk hypothesis. However, when including trading costs and maximum trading constraints, the performance of method MACDR2 weakens significantly.

Gunter Meissner, Albin Alex and Kai Nolte

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