Strategy Review | How to use the MACD indicator
Updated: Jan 24, 2021
This article will go through step-by-step on how to use the MACD indicator to trade stocks. In particular, we included one profitable MACD trading strategies that you can start trading today. Moreover, If you are interested in generating and verifying strategy ideas, we have included the strategy's code in the end. So, make sure you read until the end.
Understanding the MACD indicator
“Moving average convergence divergence (MACD) is a technical indicator that was originally designed to be a trend-following momentum indicator. However, it can also be used to trade mean reversion”
MACD was created in the 1970s. It is a simple indicator that consists of two exponential moving averages of different length.
MACD is calculated by subtracting the slow EMA from the fast EMA. The default configuration for fast and slow EMA are 12 and 26, respectively.
Calculating The Signal line
The next is to calculate the signal line, which is usually the 9-day EMA. The signal line is sometimes used as a reversal signal.
A step-by-step guide to using the MACD indicator
“Follow the rules.”
1. Configure the MACD indicator with parameters of 9,5, and 11.
2. Condition 1: Fast EMA crosses over the Slow EMA.
3. Condition 2: Signal line below zero.
4. If condition 1 and 2 are satisfied, buy at the close.
5. Sell at the close when Slow EMA crosses over the Fast EMA.
Strategy long term performance
The following test is conducted in the period between 2002 to 2020 on Invesco QQQ ETF. The software we use is #Amibroker.
Win Ratio: 72.48%
Average Profit % : 1.77%
Averageg Loss % : -2.79%
Profit Factor: 1.73
Sharpe Ratio: 0.67
Annual Return: 6.87%
This is a trend following / momentum strategy that works well on QQQ and SPY. This strategy performed very well during periods with high volatility in 2020. Let us know your thoughts and share with us your trading success!
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Code of this strategy in Amibroker for advanced traders.
fast_avg = 9; slow_avg = 5; Signal_period = 11; fast = EMA(C,fast_avg)-EMA(C,slow_avg); slow = EMA(fast,Signal_period); Buy = Cross(fast, slow) and slow<0 ; Sell = Cross(slow, fast);
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