MACD Trading Strategy: Statistics, Facts And Historical Backtests!

Can we make a profitable MACD trading strategy with the help of the MACD indicator and the MACD histogram?

This article examines the MACD indicator and its use to create a MACD trading strategy. It explains what the indicator is and how it can be used. Does it work? In which markets does it work best? Which time frame is best?

The MACD indicator is a useful tool and seems to work on stock indices. How do you trade with MACD strategy? We find the indicator useful to make MACD trading strategies.

The MACD was first mentioned in the 1970s. MACD is an abbreviation for moving average convergence/divergence. It’s simply an indicator that consists of two moving averages and how these two lines converge and diverge from each other.

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Why is it called MACD?

MACD is called MACD because it’s an abbreviation for Moving Average Convergence/Divergence indicator.

What is MACD?

MACD is primarily a momentum indicator, but it can also be used as a trend-following indicator in addition to mean reversion. It’s a versatile indicator.

Let’s look at how to calculate the MACD indicator, which is done in two steps. We include a third step, which is calculating the MACD histogram.

How to calculate the MACD for the Strategy

The first step is to calculate the MACD line:

The fast MACD line

The MACD line is also called the fast line. This is the 12-day exponential moving average deducted from the 26-day exponential average. In Amibroker, the code looks like this:

EMA(c,12) – EMA(c,26)

The fast MACD line is, in other words, the difference between the short and the long moving average. The line is often referred to as the MACD line.

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The slow MACD line/the signal line

The second step is to calculate the slow line which is the 9-day exponential moving average of the fast MACD line. This is called the signal line. The lagging signal line is often used as a reversal signal, something we’ll explain later.

The MACD histogram

This is a deviation from the original MACD indicator, which was developed later, we believe by Alexander Elder in the book called Trading For A Living. The histogram is the fast line subtracted the slower signal line. This relationship is quite important, and back in 2012, we published an article about developing a strategy based on the MACD-histogram.

Why the parameters of 12, 26, and 9?

The default settings in all trading software, books, seminars, etc., are 12, 26, and 9 days. Why is that? We assume only the inventor of the MACD, Gerald Appel, can answer that. Of course, nothing stops you from changing the parameters. However, the above settings have somehow been “stuck” with the indicator.

The chart below shows how the MACD oscillates back and forth:

The red line is the MACD line (the fast line), while the blue line is the slow signal line. The bars oscillating around zero is the MACD-histogram.

How does the MACD indicator work?

The MACD is an oscillating indicator that can capture both momentum, reversal, and trend. As always, there is no definitive answer on how to use the MACD. Most likely, you will find the best use not mentioned in any books or articles!

Which MACD setting is best? What is the best time frame for the MACD?

You have to play around with the values. The default values are just suggestions, and you need to play around with the values in order to see if you spot any patterns.

For example, the market indices move fast up and down, and you are probably better off if you use a shorter time frame.

Again, there is no definitive answer, and you must test yourself what works and what doesn’t. Be careful to generalize to other markets. No indicator works well on all markets! Something that works on the S&P 500 doesn’t necessarily work on the gold price.

MACD trading strategy

Let’s make a MACD trading strategy on the S&P 500.

Buy when the fast line crosses above the slow signal line

The above criterion is taken from Alexander Elder’s Trading For A Living. Elder didn’t test the strategy, even though this strategy is easily tested.

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This is all there is to it. On the S&P 500, we get this equity curve for the MACD trading strategy:

The CAGR is 4.19%, the average gain per trade is 0.44%, the profit factor is 1.65, and the maximum drawdown is 30%.

The code in Amibroker is like this:

Fast = EMA(C,12) – EMA(C,26);
Slow = EMA(Fast,9);

Buy = Cross(Fast, Slow);
buyPrice = Close;
Sell = Cross(Slow, Fast);
sellPrice = Close ;

The strategy is certainly untradeable. If we start optimizing to find the best MACD parameters settings, what are the best parameters?

To make a strategy optimization we need to rewrite the code:

Opt1 = Optimize(“ShortEMA”,2,2,15,1);
Opt2 = Optimize(“LongEMA”,20,6,25,1);
Opt3 = Optimize(“Slow”,5,5,15,1);

Fast = EMA(C,Opt1) – EMA(C,Opt2);
Slow = EMA(Fast,Opt3);

Buy = Cross(Fast, Slow);
buyPrice = Close;
Sell = Cross(Slow, Fast);
sellPrice = Close ;

This gives 3080 optimization steps. Amibroker is lightning fast and the optimization is done in 13 seconds. The results indicate the best parameters are somewhat in the vicinity of the default settings.

Let’s change the strategy to include a new variable but keep the same parameters in the MACD crossover:

We have reasons to suspect a MACD crossover is more bullish if it happens when the slow line is in negative territory. Is this correct? Let’s test by adding a new variable (in bold):

Fast = EMA(C,12) – EMA(C,26);
Slow = EMA(Fast,9);

Buy = Cross(Fast, Slow) and Slow<0;
buyPrice = Close;
Sell = Cross(Slow, Fast);
sellPrice = Close ;

When the slow signal line is below zero when the crossover happens, we slightly improve the results, but the number of trades is more than halved:

The CAGR is 3.44%, the average gain per trade is 0.79%, the profit factor is 1.72, and the maximum drawdown is 25%.

If we add a long-term trend filter, for example, a 200-day average, the results improve and the success rate improves.

(Many traders like to use python instead of for example Amibroker. That is fine, but trading is all about being efficient and we honestly believe you are better off using a platform that has already many of the functions ready).

MACD as overbought and oversold trading strategy

The MACD can additionally help us to find overbought and oversold conditions. We have already mentioned the MACD-histogram, and this indicator shows the difference between the fast and the slow signal line. When the distance is increasing, it means the speed of the fast line is picking up more than the slow signal line.

Let’s try a new twist of the MACD by using the MACD-histogram. For simplicity, we use the same strategy as in this article about MACD histogram strategy.

We use the following trading rules and we also show you the Amibroker code:

Here is an example of such a trade signal (using 3, 10, and 5-day lookback period):

By using 12, 26, and 9-day lookback periods, we get the following equity curve on the S&P 500 (compounded):

The CAGR is 4.79%, the average gain per trade is 0.95%, the profit factor is 4.22, and the maximum drawdown is 16%. This shows some promise, and it works pretty well on several other ETFs as well.

Combining MACD Histogram and the RSI indicator into a strategy

In a previous article, we covered how the RSI indicator works. The RSI indicator has proven to be a useful mean revertive indicator, and it might add value combined with the MACD histogram.

Let’s add a “slow histogram” and combine that with a two-day RSI. The idea is that we only buy on a low RSI but it must be combined with a low histogram reading. This is the code in Amibroker:

The compounded equity curve for the S&P 500 looks like this:

The CAGR is 6.36%, the average gain per trade is 0.76%, the profit factor is 2.45, and the maximum drawdown is 16%. Compared to the MACD histogram strategy it has more trades and works better compared to only trading the two-day RSI without any other criteria.

MACD and Crypto

We have tested the MACD indicator on crypto and bitcoin, but we had only moderate success. The reason why is that crypto this far has not been very mean revertive.

Is MACD a leading or lagging indicator?

MACD is a lagging indicator because it’s based on historical prices.

How reliable is the MACD Histogram?

The MACD histogram is a very reliable indicator. Backtests and statistics indicate that you expect to make money about 70% of the time. However, this is based on backtests for the stock market when we use the principle of mean reversion.

What is more accurate, RSI or MACD?

MACD is better at identifying momentum and divergencies, while RSI is better at pinpointing oversold and overbought levels.

What are the best settings for MACD?

The best settings for MACD depend on the asset you are trading and the time frame. Stocks are different from commodities, and forex is different from bonds. There is no one-size-fits-all for the MACD indicator. You need to backtest and analyze data to get the necessary statistics to find evidence for the best settings.

Benefits of MACD Trading Strategy

The MACD trading strategy offers several benefits to traders who incorporate it into their trading approach. Here are some key advantages of using the MACD indicator:

1. Signal Confirmation: The MACD indicator helps confirm potential trade signals by providing visual cues of momentum shifts in the market. Traders can use the convergence and divergence of the MACD lines to validate the strength of a trend or identify potential reversals.
2. Trend Identification: The MACD indicator is effective in identifying the prevailing trend in a market. By observing the relationship between the MACD line and the signal line, traders can determine whether the market is experiencing an uptrend or a downtrend, enabling them to align their trades accordingly.
3. Entry and Exit Points: The MACD strategy provides clear entry and exit points for trades. Traders can initiate a buy trade when the fast MACD line crosses above the slow signal line, indicating a potential bullish trend. Conversely, a sell trade can be initiated when the slow signal line crosses above the fast MACD line, suggesting a possible bearish trend.
4. Divergence Analysis: The MACD histogram, which represents the difference between the fast and slow lines, can help traders identify divergences between price and momentum. Divergence occurs when the price and the MACD indicator move in opposite directions, potentially signaling a reversal or trend continuation. This aspect of the MACD strategy can be particularly valuable for traders looking for potential trend reversals.
5. Versatility: The MACD indicator is versatile and can be applied to various markets and timeframes. While it has shown effectiveness in stock indices, traders can also use it in other markets, such as forex, commodities, and cryptocurrencies. Additionally, traders can adjust the MACD parameters to suit their preferred timeframes, allowing for customization and adaptability to different trading styles.
6. Supplementary Tools: The MACD indicator can be used in combination with other technical indicators or trading tools to enhance its effectiveness. For example, traders often combine the MACD with trendlines, support and resistance levels, or other oscillators to strengthen their trading signals and increase the probability of successful trades.
7. Backtesting and Optimization: The MACD trading strategy is amenable to backtesting and optimization, allowing traders to evaluate its historical performance and fine-tune the indicator’s parameters for optimal results. By conducting thorough testing on different markets and timeframes, traders can gain confidence in the strategy and make informed decisions based on empirical data.

It’s important to note that while the MACD trading strategy offers numerous benefits, it is not a foolproof method for guaranteed profitability. Traders should exercise caution, combine it with other forms of analysis, and employ risk management techniques to mitigate potential losses.

Step-by-Step Guide to Implementing MACD Trading Strategy

If you’re interested in implementing the MACD trading strategy, here is a step-by-step guide to help you get started:

1. Understand the MACD Indicator: Familiarize yourself with the MACD indicator and its components. The MACD consists of two lines, the fast line (MACD line) and the slow line (signal line), as well as the MACD histogram, which shows the difference between the two lines.
2. Calculate the MACD Line: Calculate the fast line by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. This represents the short-term and long-term moving averages.
3. Calculate the Signal Line: Calculate the slow line by taking the 9-day EMA of the fast line. The signal line is often used as a reversal signal in trading.
4. Understand MACD Oscillations: Visualize the MACD line, signal line, and histogram on a chart. The MACD oscillates above and below zero, indicating momentum, reversal, and trend.
5. Determine the Best MACD Settings: Experiment with different parameter values for the MACD indicator to find settings that work best for your trading strategy. Consider the market you are trading and the time frame you are analyzing.
6. Develop Entry and Exit Rules: Define your entry and exit rules based on MACD crossovers. A common strategy is to buy when the fast line crosses above the slow line and sell when the slow line crosses above the fast line.
7. Test and Optimize the Strategy: Backtest your MACD trading strategy using historical data to evaluate its performance. Optimize the strategy by adjusting the MACD parameter values to maximize profitability and minimize risk.
8. Consider Additional Filters: Explore the possibility of adding additional filters or indicators to enhance the MACD trading strategy. For example, you could incorporate a long-term trend filter, such as a 200-day moving average, to improve the success rate.
9. Monitor and Refine: Continuously monitor the performance of your MACD trading strategy in real-time. Make adjustments and refinements as needed based on market conditions and the results of your analysis.
10. Combine with Other Indicators: Consider combining the MACD indicator with other technical indicators, such as the Relative Strength Index (RSI), to create a more comprehensive trading strategy. Experiment with different combinations to find what works best for your trading style.

Remember, trading strategies are not one-size-fits-all, and it’s important to adapt and customize them based on your risk tolerance, trading goals, and the specific market you are trading. Always practice proper risk management and keep learning and evolving as a trader.

Common Mistakes to Avoid When Using MACD for Trading

The MACD indicator can be a valuable tool for traders, but it’s important to be aware of common mistakes that can hinder its effectiveness. Here are some key pitfalls to avoid when using MACD for trading:

1. Relying Solely on MACD Crossovers: While MACD crossovers between the fast line and the signal line can be used as trading signals, relying solely on these crossovers may result in false signals. It’s essential to consider other factors and indicators to confirm the validity of a trade.
2. Ignoring Market Context: The MACD indicator’s performance can vary across different markets and timeframes. It’s crucial to consider the specific characteristics of the market you’re trading, such as volatility, liquidity, and trading hours. Adapt the MACD strategy to suit the market conditions for better results.
3. Neglecting Price Action: The MACD is derived from moving averages, and it’s important not to overlook price action. Analyzing price patterns, support and resistance levels, and candlestick formations in conjunction with the MACD can provide a more comprehensive view of market dynamics.
4. Over-Optimizing MACD Parameters: While it can be tempting to optimize the MACD parameters to achieve the best possible results, excessive parameter tweaking can lead to curve-fitting and overfitting the indicator to past data. Be cautious when adjusting the default parameters and focus on robustness rather than short-term performance.
5. Failing to Use Stop Loss Orders: Risk management is crucial in trading, and using stop loss orders is essential to protect your capital. The MACD indicator alone does not provide information about potential stop loss levels. Incorporate appropriate risk management techniques to limit losses and preserve capital.
6. Disregarding Divergences: MACD divergences occur when the price and the MACD indicator move in opposite directions. These divergences can provide valuable insights into potential trend reversals. Ignoring divergences may result in missed trading opportunities, so be sure to monitor them alongside other technical analysis tools.
7. Neglecting Fundamental Analysis: While the MACD is a technical indicator, incorporating fundamental analysis can enhance your trading decisions. Pay attention to relevant news, economic events, and company-specific factors that can influence price movements. Combining technical and fundamental analysis can provide a more comprehensive trading strategy.

Remember, no trading strategy, including those involving the MACD indicator, is foolproof. It’s crucial to continuously monitor and adapt your approach based on market conditions and feedback from your trading results. Practice risk management, employ proper trade analysis, and avoid common mistakes to increase your chances of success when using the MACD indicator for trading.

Advanced Techniques to Enhance Your MACD Trading Strategy

While the MACD indicator is a powerful tool on its own, there are advanced techniques that can further enhance your MACD trading strategy. By incorporating these techniques, you can potentially improve your trading results and increase your profitability. Here are some advanced techniques to consider:

1. Divergence Analysis: In addition to the standard MACD signals, you can look for divergences between the MACD indicator and price movements. Divergence occurs when the MACD and price move in opposite directions. Bullish divergence is identified when the price forms lower lows while the MACD forms higher lows. Conversely, bearish divergence occurs when the price creates higher highs while the MACD forms lower highs. Divergence analysis can provide valuable insights into potential trend reversals or trend continuation.
2. Multiple Time Frame Analysis: Instead of relying solely on one time frame, you can incorporate multiple time frames into your MACD analysis. For example, if you primarily trade on the daily chart, you can use the MACD on higher time frames like the weekly or monthly to get a broader perspective of the overall trend. This can help you make more informed trading decisions by aligning your trades with the dominant trend across different time frames.
3. Trend Filtering: To increase the effectiveness of your MACD strategy, consider adding a trend filter. This can be done by incorporating a longer-term moving average, such as the 200-day moving average, to identify the direction of the primary trend. By only taking MACD signals that align with the trend filter, you can potentially improve the quality of your trades and avoid counter-trend signals during periods of consolidation or market noise.
4. Confirmation Indicators: While the MACD can be a reliable indicator on its own, you can enhance its signals by using additional confirmation indicators. For instance, you can combine the MACD with other oscillators like the Relative Strength Index (RSI) or the Stochastic Oscillator to validate potential trade setups. When the MACD generates a signal in the direction of the trend, and the confirmation indicators also confirm the signal, it can increase your confidence in taking the trade.
5. Money Management: Implementing proper money management techniques is crucial for any trading strategy, including MACD-based strategies. Determine your risk tolerance and use appropriate position sizing techniques to protect your capital. Consider setting stop-loss orders based on key support or resistance levels to manage your risk effectively. Additionally, you can use trailing stops to protect profits and allow for potential trend continuation.

Remember, it’s important to thoroughly backtest and forward test any modifications or advanced techniques you incorporate into your MACD trading strategy. Each market and timeframe may require adjustments and fine-tuning to optimize your results. Continuously monitor and evaluate the performance of your strategy, making necessary adjustments as market conditions change.

By utilizing these advanced techniques, you can take your MACD trading strategy to the next level and potentially increase your profitability in the markets. Always remember to exercise proper risk management and trade responsibly.

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Conclusion about MACD and its trading strategies

As with all other indicators, the MACD is a lagging indicator. The moving average crossover most likely has limited use as a stand-alone trading signal, but the MACD histogram trading strategy shows some real promise, albeit not the best swing trading indicator. However, the MACD-histogram is a mean reversion indicator, and there are probably other and better indicators for that, like for example, the RSI indicator.

Glossary – MACD Trading Strategy

Just the name MACD might scare off many readers who otherwise find the indicator useful. To help you out we made a MACD glossary:

1. MACD (Moving Average Convergence Divergence): A popular technical indicator that shows the relationship between two moving averages of an asset’s price, helping traders identify potential trends.
2. EMA (Exponential Moving Average): A type of moving average that gives more weight to recent price data, commonly used in MACD calculations.
3. Signal Line: A moving average of the MACD line, often a 9-period EMA, used for generating trading signals.
4. MACD Histogram: A visual representation of the difference between the MACD line and the signal line, used to identify potential trend changes.
5. Fast MACD Line: The shorter-term EMA in the MACD calculation, typically 12-period.
6. Slow MACD Line: The longer-term EMA in the MACD calculation, usually 26-period.
7. Zero Line: A horizontal line on the MACD histogram that represents the point of no divergence between the fast and slow MACD lines.
8. MACD Crossover: A bullish signal when the fast MACD line crosses above the slow MACD line, and a bearish signal when it crosses below.
9. Divergence: A situation where the MACD indicator disagrees with the price movement, potentially signaling a trend reversal.
10. Histogram Convergence: When the MACD histogram bars move closer together, indicating a potential trend continuation.
11. Histogram Divergence: When the MACD histogram bars move farther apart, signaling a potential trend reversal.
12. Oscillator: A technical indicator that fluctuates above and below a centerline (usually zero), like the MACD.
13. Golden Cross: A bullish signal when the 12-period EMA crosses above the 26-period EMA on a price chart.
14. Death Cross: A bearish signal when the 12-period EMA crosses below the 26-period EMA on a price chart.
15. MACD RSI Strategy: A trading strategy that combines MACD and Relative Strength Index (RSI) indicators for more robust signals.
16. MACD Divergence Strategy: A strategy that focuses on identifying divergences between MACD and price to predict reversals.
17. MACD Histogram Strategy: A method that uses the MACD histogram’s movements to generate trading signals.
18. MACD Histogram Reversal: When the MACD histogram changes direction, signaling a potential trend reversal.
19. MACD Zero Line Cross: A trading signal when the MACD line crosses the zero line, indicating a change in trend direction.
20. MACD Bearish Divergence: A bearish signal occurring when the price makes higher highs while the MACD makes lower highs.
21. MACD Bullish Divergence: A bullish signal happening when the price makes lower lows while the MACD makes higher lows.
22. MACD EMA Crossover: A trading strategy that relies on the crossover of the MACD and signal line.
23. MACD Histogram Bullish Cross: When the MACD histogram crosses above the zero line, indicating a potential uptrend.
24. MACD Histogram Bearish Cross: When the MACD histogram crosses below the zero line, signaling a potential downtrend.
25. Slope of MACD Line: The angle at which the MACD line is moving, suggesting the strength of a trend.
26. MACD Zero Lag: An attempt to reduce the lag in MACD signals by using different settings or smoothing techniques.
27. False Signal: A signal generated by the MACD strategy that doesn’t lead to the expected price movement.
28. Confirmation: Additional analysis or indicators used to validate a MACD trading signal.
29. Overbought: A situation where an asset’s price appears to be too high, often associated with a bearish signal.
30. Oversold: A situation where an asset’s price appears to be too low, often associated with a bullish signal.
31. Scaling In: Gradually entering a trade position by buying or selling in increments.
32. Scaling Out: Gradually exiting a trade position by taking profits or reducing exposure.
33. Position Sizing: Determining the number of contracts or shares to trade based on risk tolerance and strategy.
34. Backtesting: Evaluating a trading strategy’s performance using historical data.
35. Drawdown: The peak-to-trough decline in the value of a trading account or investment.
36. Risk-Reward Ratio: The ratio of potential profit to potential loss in a trade.
37. Trade Entry: The point at which a trader initiates a position based on MACD signals.
38. Trade Exit: The point at which a trader closes a position, often determined by MACD signals.
39. Volatility: A measure of an asset’s price fluctuations, which can impact MACD signals.
40. Whipsaw: A situation where a trader gets false signals that result in losing trades.
41. Leading Indicator: An indicator, like MACD, that provides signals before price movements.
42. Lagging Indicator: An indicator that confirms price movements after they’ve occurred.
43. Crossover Strategy: A trading approach that relies on the MACD line crossing the signal line.
44. Moving Average Divergence: When the two MACD lines move away from each other, indicating a trend is strengthening.
45. Moving Average Convergence: When the two MACD lines move toward each other, suggesting a potential trend reversal.
46. MACD Oscillation: The regular up and down movements of the MACD indicator.
47. Zero-Line Rejection: When the MACD line briefly crosses the zero line but then reverses.
48. Market Sentiment: The collective attitude of traders and investors, which can influence MACD signals.
49. Risk Management: Strategies and techniques to protect trading capital and minimize losses.
50. Trade Plan: A documented strategy, including entry and exit rules, risk management, and goals for using MACD in trading.