The traditional MACD

The results from the empirical testing of the traditional MACD indicator were surprisingly poor. For the individually, out-of-sample tested NASDAQ-100 stocks over a 10-year period, only 32.73% of the total trades generated a profit. A similar result is obtained for in sample tested 30 stocks of the Dow Jones Industrial Average over the last 10 years. Here only 32.14% of all trades resulted in a profit. Thus, the traditional MACD indicator can almost be regarded as a contra-indicator.

The reasons for the poor results are twofold: 1) A weak buy or sell signal is given and no significant trend follows. 2) Due to the lagging nature of the MACD indicator, the reversal of the trade is done too late.

The model MACDR1

As mentioned in section 2., model MACDR1 addresses these two weaknesses. The results of model MACDR1 are shown in table 1:

Table 1: Results from model MACDR1 for the NASDAQ-100 stocks

Two scenarios are tested regarding model MACDR1. The position is closed when a gain of greater equal 3% is achieved and when a gain of greater equal 5% is achieved. For the 3% target, the actually achieved average profit is 4.92%. For the 5% target, the actually achieved average profit is 6.88 %.

As seen in Table 1, model MACDR1 outperforms the traditional MACD model, which resulted in a 32.73% success rate. The success rate of model MACDR1 is on average 61.62% for the 3% target.

The bullish success rates are as expected a little bit higher than the bearish ones, considering that this study is done during a bull market. It is also encouraging to see that the bearish signals are successful more than 57% in the bull market. This study shows that model MACDR1 is able to find profitable short-selling opportunities even in a strong bull market.

Model MACDR1 generated significantly better trading results than the traditional MACD model. But when analyzing the simulated trades it became clear that model MACDR1 sometimes generated trade signals even if the trend was weak. Model MACDR2 is an improvement of model MACDR1 in terms of trend-identification.

The Model MACDR2

The results of model MACDR2, which gives a buy or sell signal if the difference between the MACD1 and Signal indicator is bigger than a certain percentage of the stock price, are seen in Table 2. Model MACDR2 improves the results of model MACDR1 significantly. As to be expected, the higher the degree of crossing of the MACD1 and Signal line, the higher the success rate was. This comes at the expense of fewer trading signals.

Gunter Meissner, Albin Alex and Kai Nolte

Next: Model MACDR2 and Option Trading

Summary: Index