OWN MOUNTAIN TRADING COMPANY PRESENTS - Easy · OWN MOUNTAIN TRADING COMPANY PRESENTS Exclusive Paid Edition ... We continue to rely on our method of separating the entries from the

© 2009 by Own Mountain Trading Company

OWN MOUNTAIN TRADING COMPANY PRESENTS

Exclusive Paid Edition

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http://www.backtestingreport.com/BackTestingReportBaseline.pdf


2 BackTestingReport.com. Copyright ©2009 Own Mountain Trading Company. This material is intended for educational purposes, not investment advice. See Terms of Use.

Contents

Contents ...................................................................................................................................... 2

Letter from the Editor ................................................................................................................. 3

Quick Review ............................................................................................................................... 4

Backtesting in Brief ................................................................................................................. 4

How to Compare Entry Strategies .......................................................................................... 4

MACD Overview .......................................................................................................................... 4

The Intention of the MACD ..................................................................................................... 4

The Parts of the MACD ............................................................................................................ 4

Histogram, Smistogram – What’s the Difference? ................................................................. 6

Advanced MACD Signals ......................................................................................................... 7

Strategies Tested in this Issue ................................................................................................. 8

Backtesting Setup Details ........................................................................................................... 9

Backtesting Results ................................................................................................................... 10

Active Investors ..................................................................................................................... 10

Position Traders .................................................................................................................... 15

Swing Traders ........................................................................................................................ 20

Conclusion ................................................................................................................................. 25

Next Steps ................................................................................................................................. 25

How to Apply These Strategies ............................................................................................. 25

Resources .................................................................................................................................. 26

Understanding Technical Indicators Made Easy with BackTesting Report .............................. 27

Related Reading .................................................................................................................... 29

Bibliography .......................................................................................................................... 29

Videos .................................................................................................................................... 29

Software ................................................................................................................................ 29

Web Sites .............................................................................................................................. 29

Disclaimer .................................................................................................................................. 30

This report builds upon Issue1. Reading it first is highly recommended.

Download Issue1 – Baseline (it’s free) from http://www.backtestingreport.com/BackTestingReportBaseline.pdf

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.



Letter from the Editor April 2009 Dear Reader- This is the first issue in a series about Moving Average Convergence-Divergence or MACD. The MACD exists to give you a jump on the moving average crossover by tracking how two moving averages come together (converge) and drift apart (diverge). The MACD instantly became one of my favorite indicators when I saw how the MACD Histogram signaled the start of the 2003 bull market in a set of Trader’s Camp DVDs. My experience has not been quite that good but I am still motivated to try to find a way to put MACD to profitable use. I just reviewed those DVDs lately, which include a Master’s Class by Gerald Appel, the inventor of the MACD. He covers many subtleties of the MACD. Some of the objective bits about MACD are tested in this series of reports. Other applications are too subjective to put through the backtesting engine. I’ll rant about that more in the next issue. It will take a few reports to get a handle on the MACD – it is not a simple indicator and the literature is contradictory. This issue of BackTesting Report sorts out the different ways to use MACD, and looks for the most reliable buy signals. It also compares a short list of recommended parameter settings, making it almost two reports in one. We continue to rely on our method of separating the entries from the exits, and for good reason. Gerald Appel teaches the use of different settings for selling versus buying, and we check the “sell” settings in upcoming issues. As a grand finale to the MACD series, we’ll see how divergences between the indicator and price tend to play out. Dr. Alexander Elder calls the MACD Histogram divergence “the strongest signal in technical analysis”⁴ and also one of the most difficult to program in a computer. That will be a very special report which uses advanced algorithms to get a reading on these elusive signals. While researching the current issue, I found widespread confusion about how to calculate the MACD Histogram as well as how to use it. In this issue, I’ll give you a complete briefing so that, when you see a MACD on a chart, you can tell at a glance how it was made, what it says about the market, and most importantly, how much to count on it based on its track record. Sincerely, Jackie Ann Patterson

Editor, BackTesting Report Director, Own Mountain Trading Company

http://www.backtestingreport.com/


Quick Review

Backtesting in Brief

Backtesting measures the relative performance of a set of trading strategies on historical price data. Since backtesting relies on past data, it makes no guarantees about future performance and can’t say whether a strategy will do as well in the future as it did in the past. However, if a strategy didn’t perform in the past, there’s no reason to believe it will suddenly turn into a winner. It pays to avoid strategies with a losing track record. Although most traders agree that backtesting is useful, many traders don’t do it because of the time, expense, and expertise required. Backtesting Report gives you a leg up on the markets without doing all the work yourself.

How to Compare Entry Strategies

Picking entry strategies which have win rates above the baseline is a good start. Win rate also provides a hint on the ease of following a system. For example, consider if you can really stick to a trading plan that only wins 10% of the time. Most importantly, remember that win rate alone doesn’t determine if a strategy is profitable – the size of the wins and losses matters, too. When testing a real exit strategy, expectancy becomes more important than win rate.

MACD Overview The first thing to know about MACD is what the acronym stands for: Moving Average Convergence Divergence. That’s too much of a mouthful for polite company so let’s just use MACD. All the letters in its name are often spoken – “M-A-C-D”, although Mac-D is easier.

The Intention of the MACD

The basic idea to keep in mind about the MACD is that it evolved as a way to anticipate a moving average (MA) crossover and jump ahead of other traders waiting for the MA crossover signal. MACD anticipates MAs crossovers by tracking how the two moving averages come together (converge) and drift apart (diverge).

The Parts of the MACD

The main line of the MACD tracks the relative position of the two moving averages by measuring the difference between them. As the MAs move together the MACD line moves towards zero, approaching it from the top when anticipating a sell signal and coming up from the bottom for a buy signal. The MACD line crosses zero at the exact same point as the exponential moving average crossover. When the MACD line is above zero, the MAs have crossed over into the bull market configuration of the fast MA above the slower MA. When the MACD line is below zero, the MAs are in the opposite bear market configuration. See Figure 1 below. If the MA crossover was all we wanted, we could just stick with the two MAs and call it good. In fact, some notable traders do exactly that. But, remembering the intent is to anticipate the

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crossover, MACD gives definite signals in advance of the crossover. In addition to the zero crossing, three more ways evolved to interpret MACDs, each giving progressively earlier signals.

Figure 1 - TradeStation screenshot of relationship between MACD Lines and MAs. Black line is 12-day EMA, brown is 26-day EMA, blue is MACD, purple is Signal line.

The most well-known MACD signal is called, appropriately enough, the MACD Signal Line. This is an exponential moving average of the MACD itself. When the MACD crosses up through its signal line, it indicates a buying opportunity. It’s considered especially strong if the MACD is below zero (indicating an oversold market) at the time of the crossover. When the MACD crosses down through its signal line, it’s a sell signal, especially if it happens above the zero line to indicate an overbought market. The crossing of the signal line gives you some advance notice of a moving average crossover as illustrated in Figure 1. To back up in time to catch an even earlier signal, you use the same methods on the MACD that went into its creation. That is, look to see when the line turns. With the naked eye, it’s easier to see the turning point if the MACD is drawn as a histogram. Then you simply compare the height of the current bar to the previous bar. If the current bar is below zero but dropping less low than the previous one, it’s a buy signal. If the current bar is above zero and shorter than the previous, it signals a sell. Figure 2 shows the histogram and highlights the uptick before the lines signal on the same chart as Figure 1.


Figure 2 -- TradeStation screenshot of Appel's MACD Histogram. Arrow points to a buy signal as the histogram ticks up from below zero.

Histogram, Smistogram – What’s the Difference?

Here’s where things get a little murky. Two different MACD histograms float around in the world. Gerald Appel, money manager, trader and the inventor of the MACD thinks it started with the original monograph on MACD he wrote decades ago. He says, “Everybody who has written about MACD, I think, has taken what they wrote from that monograph, which I [now] think was inaccurate. “¹ Mr. Appel draws a histogram under the MACD line representing the difference between the two moving averages. From here forward, let’s call this Appel’s histogram. Most texts describe the MACD Histogram in this manner. However, most chart packages and texts actually calculate the MACD Histogram another way. They plot the histogram as the difference between the MACD and its signal line. Let’s continue to refer to this as the MACD Histogram, a.k.a. MACDH. See Figure 3 below for a graphic comparison of the two histograms.

Where do you look on the MACD to find the most promising buy signal?


Figure 3 - TradeStation screenshot comparing the two types of MACD Histogram. Appel's Histogram is on the bottom. The commonly drawn MACDH is in the middle of the screen.

You can tell which kind of histogram you have on any chart by looking at how the zero crossings of the histogram relate to the zero crossings of the MACD lines. If the bars in the histogram cross zero at the same time as the lines cross zero, it is Appel’s histogram. If, however, the bars cross zero when the MACD lines cross each other, then it is the MACDH. The MACDH uptick or downtick is the earliest signal. It is the first to detect when price is moving in the direction that will cause a moving average crossover. The MACDH is the most sensitive signal and that means it may also be prone to having the most false signals. When you see a histogram on a chart, take a quick moment to check what type, so you know if you’re getting the early signal or the later one. You can use the results from this report to see the performance track record of both types of histogram.

Advanced MACD Signals No discussion of MACD would be complete without mentioning divergences. These important signals occur when price hits a new extreme while the indicator is actually showing that it’s a less powerful move. See Figure 4 for a triple bullish divergence on both the MACD lines and histogram. In a triple divergence, price makes a low three times, and at each low, the MACD reading is successively higher. Backtesting any indicator divergence is challenging and comes with its own set of parameters to tweak. We will explore MACD divergences in a future dedicated issue of BackTesting Report.


Figure 4 - TradeStation screenshot of a MACD and MACDH bullish divergence.

Strategies Tested in this Issue The main topic of this issue is MACD buy signals. To avoid an overwhelming amount of data, we first pick the best style as determined by reliability. Then we’ll check different parameter settings on one leading style only. This will save you from wading through a bunch of parameter data on unused entries. These four different entry signals are tested in this issue:

MACD lines crossing each other while below 0

Appel’s Histogram Uptick while below 0

MACDH Uptick while below 0

MACDH Uptick while below 0 with price above the 200 MA Three basic parameter settings of 12-26-9, 19-39-9, 6-19-9 are tested. In addition, Mr. Appel’s Power Tools book² describes a method of using the slope of a moving average to choose the parameter settings for the MACD. That is also tested in this report and compared to the basic settings. Powers Tools reveals more nuances for using the MACD as well as other market timing tools that are not covered in this report. For this test, the TradeStation® backtesting engine ran custom EasyLanguage code which invoked the built-in function MACD()to calculate the MACD lines. A slight modification produced Appel’s histogram. The ready-made function Elder.MACDH() calculated the MACD histogram. To properly evaluate the entry signals, the test strategies always exit after a pre-defined number of days in exactly the same manner as the baseline. This is not a complete trading strategy. It only serves to determine if MACD or its histogram can give useful buy signals. Upcoming reports test MACD-related exit strategies.


Backtesting Setup Details

Markets: US Stocks and international stocks represented by ADRs on NYSE, AMEX, NASDAQ including delisted tickers. (Click here for stock lists.) Time Periods: May 1994 - April 2008, divided into three samples to prevent over-optimization. May 1994 – April 2004 denoted by darker blue Ten-year period chosen to include major up, down and sideways movements. May 2004 – April 2007 denoted by medium blue Out-of-sample data for the original period. At 3 years, it’s 1/3 as long as original. May 2007 – April 2008 denoted by light blue Current data. It’s 1/3 of the previous sample and is more out-of-sample data. (Click here for background on time period selection.) Direction: Long Only Entry Strategy: Enter all stocks according to the MACD lines and histogram signals described above, when volume criterion is met (more than 500,000 shares daily). All entries are next day via Market on Open orders. All runs comparing entry types used the de-facto standard settings of 12, 26, 9 (fast-slow-signal). The MACD parameter settings which were tested separately were (fast-slow-signal): 12-26-9, 19-39-9, 6-19-9

Exit Strategy: Timed Exits of 2 days, 20 days, 200 days, chosen as the simplest way to make a baseline for popular Trader Types. It exits via Market on Close orders. Sizing: 1000 shares for every trade. Backtesting Engine: TradeStation version 8.3, Build 1631 and Build 1634 (for Appel Histogram only) Data Vendor: CSI Data This data set was specially selected for accuracy after extensive testing. (Click here for background on data preparation.)

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Backtesting Results

This report focuses on Win Rate, which is the metric to beat for entry strategies in similar exit conditions. Three time periods are tested separately to help guard against curve fitting. Results are sectioned by Trader Types for readability.

Active Investors

MACD Entry Types for Active Investors

BackTesting Report tests entries for active investors by using a 200-day timed exit to assess the win rate after a longer term holding period. The backtesting results shown in Figure 5 - Figure 7 demonstrate why so many persist in drawing the MACDH as they do: it performed better than MACD Lines crossing and beat the baseline in all three time periods tested. Appel’s histogram fell short of the baseline in two of the time periods tested, so even though it edged ahead of MACDH in 2004-2007, it is too inconsistent to be declared the winner. The best results came from adding the 200-day moving average (MA) as a filter and only buying stocks when they are priced above the 200-day MA and have an uptick on the MACDH from below the zero line.

Figure 5

MACD Lines Appel's

Histogram

MACD Histogram

MACD Histogram and

Price Above 200 MA

50.0%

55.0%

60.0%

65.0%

70.0%

Win

Rat

e

Active Investing MACD Entries 1994 - 2004

BaselineEntry_Type

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Figure 6

Figure 7

MACD Lines

Appel's Histogram MACD

Histogram

MACD Histogram and

Price Above 200 MA

55.0%

60.0%

65.0%

70.0%

75.0%

Win

Rat

e


Baseline

Entry Type

MACD Lines

Appel's Histogram

MACD Histogram

MACD Histogram and

Price Above 200 MA

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

Win

Rat

e


Baseline

Entry Type


Table 1 summarizes the results for active investors. In general, potentially profitable strategies have a positive expectancy, shown in green. Losing strategies have their negative expectancies colored red. Yellow indicates that the expectancy was slightly positive, but rounded down to zero – indicating caution. Expectancies are a very rough guideline at this stage because we are using timed exits. Table 1

MACD Entry Types Productivity Reliability Probability

Name of Strategy Under Test # Trades Avg Hold %Wins Expect StdDev

Active Investor

MACD Lines Cross < 0 1994-2004 200day 9298 195 57.30% 0.1565 1.80

Appel's Histogram 1994-2004 200day 14954 195 56.22% 0.1419 1.28

MACD Histogram UpTick 1994-2004 200day 16009 194 57.89% 0.1523 0.82

MACDH Up + Above MA200 1994-2004 200day 11429 194 59.36% 0.1615 1.14

MACD Lines Cross <0 2004-2007 200day 3278 198 63.53% 0.0976 0.41




MACD Lines Cross < 0 2007-2008 200day 644 199 18.91% -0.2059 0.28

Appel's Histogram 2007-2008 200day 942 198 22.59% -0.1801 0.33

MACD Histogram UpTick 2007-2008 200day 1063 199 24.72% -0.1606 0.32

MACDH Up + Above MA200 2007-2008 200day 796 199 28.73% -0.1206 0.31

MACD Parameter Settings for Active Investors

With one notable exception detailed in the next paragraph, varying the parameter settings for the MACDH didn’t make much difference in the win rates. See Figure 8 - Figure 10 below. The MACD Power Tools approach offered a significant advantage in the difficult 2007-2008 time period. Its win rate exceeded both the baseline’s and the more basic MACDH entry strategies’ by roughly 9%. These results indicate that it may help protect assets in difficult times and that is one of the main points of the Power Tools book. However, the Power Tools results were less remarkable in the other test periods, even falling below the baseline during 1994-2004. If this approach can deliver larger gains than losses, the benefits might outweigh the lower reliability. We will evaluate this potential in the MACD exit strategies BackTesting Report.

Even with a longer term outlook, Active Investors were better off jumping in on a MACDH uptick, not waiting for MACD Lines to cross.

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Figure 8

Figure 9

MACDH 12,26,9

MACDH 19,39,9

MACDH 6,19,9

MACD Power Tools

50.0%

55.0%

60.0%

65.0%

70.0%

Win

Rat

e

Active Investing MACDH Settings 1994 - 2004

BaselineEntry_Type

MACDH 12,26,9

MACDH 19,39,9

MACDH 6,19,9

MACD Power Tools

55.0%

60.0%

65.0%

70.0%

75.0%

Win

Rat

e


Baseline

Entry Type


Figure 10

Table 2

MACDH Settings Productivity Reliability Probability


Active Investor

MACDH 12,26,9 1994-2004 200day 16009 194 57.89% 0.1523 0.82

MACDH 19,39,9 1994-2004 200day 15925 194 57.55% 0.1455 0.82

MACDH 6,19,9 1994-2004 200day 15973 194 58.20% 0.1593 0.99

MACD Power Tools 1994-2004 200day 16213 194 55.80% 0.3369 3.50

MACDH 12,26,9 2004-2007 200day 4215 196 64.33% 0.1107 0.40

MACDH 19,39,9 2004-2007 200day 4239 196 64.01% 0.1088 0.40

MACDH 6,19,9 2004-2007 200day 4207 196 63.88% 0.1022 0.37


MACDH 12,26,9 2007-2008 200day 1063 199 24.72% -0.1606 0.32

MACDH 19,39,9 2007-2008 200day 1018 199 24.83% -0.1640 0.31

MACDH 6,19,9 2007-2008 200day 1061 199 24.11% -0.1634 0.32

MACD Power Tools 2007-2008 200day 1141 199 33.63% -0.0619 0.94

MACDH 12,26,9

MACDH 19,39,9

MACDH 6,19,9

MACD Power Tools

15.0%

20.0%

25.0%

30.0%

35.0%

Win

Rat

e


Baseline

Entry Type











Position Traders

MACD Entry Types for Position Traders

A position trader seeks intermediate-term opportunities. To be successful, a position trader gets in on a burst of action -- perhaps one leg of a longer-running trend -- and gets out before the action fades. This is modeled with 20 day timed exits in order to test entry strategies. As it turns out, the tests for MACD were inconclusive for position traders. All entry tactics and all setting performed about the same in terms of win rate. See Figure 11 - Figure 16.

Figure 11

MACD Lines

Appel's Histogram

MACD Histogram

MACD Histogram and

Price Above 200 MA

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

Win

Rat

e

Position Trading MACD Entries 1994 - 2004

BaselineEntry_Type


Figure 12

Figure 13

MACD Lines

Appel's Histogram

MACD Histogram

MACD Histogram and

Price Above 200 MA

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

Win

Rat

e


Baseline

Entry Type

MACD Lines

Appel's Histogram MACD

Histogram

MACD Histogram and

Price Above 200 MA

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

Win

Rat

e


Baseline

Entry Type


See Table 3 for the complete results for position traders. In general, potentially profitable strategies have a positive expectancy, shown in green. Losing strategies have their negative expectancies colored red. Yellow indicates that the expectancy was slightly positive, but rounded down to zero – indicating caution. Expectancies are a very rough guideline at this stage because we are using timed exits. Table 3



Position Trader

MACD Lines Cross < 0 1994-2004 20day 25894 20 54.15% 0.0152 0.22




MACD Lines Cross <0 2004-2007 20day 16837 20 56.13% 0.0105 0.13








MACD Parameter Settings for Position Traders

The various settings for MACDH came out about the same for position traders. During 2007-2008, they all did a little better than the baseline, perhaps saving a few losses during these down years. The real test of the trading strategies will be adding exits to see if expectancy improves by producing larger gains and smaller losses due to the MACDH signals.

All flavors of the MACD tested out roughly the same as each other and only slightly better than the baseline for Position Traders.











Figure 14

Figure 15

MACDH 12,26,9

MACDH 19,39,9

MACDH 6,19,9

MACD Power Tools

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

Win

Rat

e

Position Trading MACDH Settings 1994 - 2004

BaselineEntry_Type

MACDH 12,26,9

MACDH 19,39,9

MACDH 6,19,9

MACD Power Tools

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

Win

Rat

e


Baseline

Entry Type


Figure 16

Table 4



Position Trader

MACDH 12,26,9 1994-2004 20day 69666 20 54.12% 0.0175 0.20

MACDH 19,39,9 1994-2004 20day 65826 20 54.10% 0.0160 0.19

MACDH 6,19,9 1994-2004 20day 73238 20 54.63% 0.0202 0.20


MACDH 12,26,9 2004-2007 20day 23458 20 55.48% 0.0099 0.12

MACDH 19,39,9 2004-2007 20day 22124 20 55.52% 0.0099 0.12

MACDH 6,19,9 2004-2007 20day 24862 20 55.21% 0.0092 0.11


MACDH 12,26,9 2007-2008 20day 7441 20 46.63% -0.0080 0.12

MACDH 19,39,9 2007-2008 20day 7024 20 47.29% -0.0067 0.12

MACDH 6,19,9 2007-2008 20day 7860 20 45.24% -0.0120 0.12


MACDH 12,26,9

MACDH 19,39,9 MACDH

6,19,9

MACD Power Tools

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

Win

Rat

e


Baseline

Entry Type











Swing Traders

MACD Entry Types for Swing Traders

Figure 17 - Figure 19 show the results of backtesting various MACD entry tactics for swing traders. A Swing Trader capitalizes on short-term price movements. This is modeled with 2-day timed exits in order to test entry strategies. The MACD line crossover and Appel’s histogram uptick consistently under-performed the baseline. The MACDH, as popularly constructed, stayed above the baseline in two of three timeframes. The clear leader of the MACDs for the swing trader is the combination of price above 200-day moving average (MA) and MACDH uptick which beat the baseline in all three test periods. This is consistent with other findings, such as the Moving Average Buy Signal BackTesting Report, where the addition of the 200-day MA screen improves the win rate.

Figure 17

MACD Lines

Appel's Histogram

MACD Histogram

MACD Histogram and

Price Above 200 MA

45.0%

47.0%

49.0%

51.0%

53.0%

55.0%

Win

Rat

e

Swing Trading MACD Entries 1994 - 2004

BaselineEntry_Type

http://www.backtestingreport.com/moving_average_for_swing_traders.htm


Figure 18

Figure 19

MACD Lines

Appel's Histogram

MACD Histogram

MACD Histogram and

Price Above 200 MA

45.0%

47.0%

49.0%

51.0%

53.0%

55.0%

Win

Rat

e


Baseline

Entry Type

MACD Lines

Appel's Histogram

MACD Histogram

MACD Histogram and

Price Above 200 MA

45.0%

47.0%

49.0%

51.0%

53.0%

55.0%

Win

Rat

e


Baseline

Entry Type


Table 5 summarizes the MACD entry type results for swing traders. In general, potentially profitable strategies have a positive expectancy, shown in green. Losing strategies have their negative expectancies colored red. Yellow indicates that the expectancy was slightly positive, but rounded down to zero – indicating caution. Expectancies are a very rough guideline at this stage because we are using timed exits. Table 5



Swing Trader





MACD Lines Cross <0 2004-2007 2day 14068 2 50.36% -0.0005 0.05








MACD Parameter Settings for Swing Traders

The MACD parameter test results (Figure 20 - Figure 22) suggest that swing traders might be better off with faster settings. In all our cases, the fastest setting tested -- 6,19,9 – did the best and beat the baseline for swing traders.

Swing traders might improve win rates by using MACDH with fast (6,19,9) settings and a 200-day MA filter to get buy signals.











Figure 20

Figure 21

MACDH 12,26,9 MACDH

19,39,9

MACDH 6,19,9

MACD Power Tools

45.0%

47.0%

49.0%

51.0%

53.0%

55.0%

Win

Rat

e

Swing Trading MACDH Settings 1994 - 2004

BaselineEntry_Type

MACDH 12,26,9

MACDH 19,39,9

MACDH 6,19,9

MACD Power Tools

45.0%

47.0%

49.0%

51.0%

53.0%

55.0%

Win

Rat

e


Baseline

Entry Type


Figure 22

Table 6


Name of Strategy Under Test

# Trades

Avg Hold %Wins Expect StdDev

Swing Trader

MACDH 12,26,9 1994-2004 2day 154069 2 49.35% 0.0010 0.07

MACDH 19,39,9 1994-2004 2day 149989 2 48.98% 0.0005 0.07

MACDH 6,19,9 1994-2004 2day 159332 2 49.86% 0.0016 0.07


MACDH 12,26,9 2004-2007 2day 56902 2 51.35% 0.0005 0.05

MACDH 19,39,9 2004-2007 2day 55492 2 50.90% 0.0000 0.04

MACDH 6,19,9 2004-2007 2day 59080 2 51.41% 0.0008 0.04


MACDH 12,26,9 2007-2008 2day 18981 2 48.26% -0.0011 0.05

MACDH 19,39,9 2007-2008 2day 18154 2 48.30% -0.0006 0.05

MACDH 6,19,9 2007-2008 2day 19998 2 49.11% -0.0010 0.05


MACDH 12,26,9

MACDH 19,39,9

MACDH 6,19,9

MACD Power Tools

45.0%

47.0%

49.0%

51.0%

53.0%

55.0%

Win

Rat

e


Baseline

Entry Type













Conclusion

This report tested several different MACD entry styles and parameter settings. Better results came from taking the earliest buy signal – the MACDH uptick. Adding a 200 day MA to screen for stocks in an uptrend improved the win rates for active investors and swing traders. Overall, position traders didn’t get much benefit from the MACD in any of the configurations tested. Swing traders did better with faster settings – 6-19-9 performed well in these tests. Otherwise, the parameter settings did not significantly affect the results. Win rates are in the 50-60% range predicted by Mr. Appel, who also attributes to the MACD larger wins than losses. Stay tuned for the BackTesting Report on MACD exit strategies where we will compare expectancies for the different MACD strategies. It is wise to withhold final judgment until all the data is in.

Next Steps

How to Apply These Strategies

Most charting software is capable of plotting MACD automatically. However, you need to look closely to see what type of histogram you’re getting. For example, Yahoo Finance serves up MACDH on Interactive Charts but Appel’s Histogram on Basic Tech. Analysis. For detailed instructions, see http://www.backtestingreport.com/MACD_on_FreeStockCharts.pdf See Figure 23 for an example at the right edge of the chart of the buy signal which had the highest reliability in backtesting.

Figure 23 - TradeStation screenshot of MACDH buy signal

http://finance.yahoo.com/echarts?s=AAPL#chart1:symbol=aapl;range=1y;indicator=volume+macd;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

http://finance.yahoo.com/q/ta?s=AAPL&t=1y&l=on&z=m&q=l&p=&a=m26-12-9&c=

http://www.backtestingreport.com/MACD_on_FreeStockCharts.pdf


Resources

Free Charts

You can simply plot the MACD lines and histogram on a chart. Most tools can do this with built-in functions. For detailed instructions on how to use a free tool, see http://www.backtestingreport.com/MACD_on_BestFreeCharts.pdf . FreeStockCharts.com - free interactive charts made with BATS real-time data

Yahoo.com – free, online stock charts made with CSI Data for historical charts

Automated Scans for MACD Divergences

To save yourself hundreds of hours searching for MACD Divergences, check out the BackTesting Report custom scans for MACD Divergences. Check out BackTesting Report’s package of TradeStation (TS) strategies and functions which highlight MACD Divergences on a chart. The TS strategies generate MACD Divergence buy and sell signals that can be used (at your own risk), with either the TS automated trade execution, the backtesting engine, the scanner, the RadarScreen®, or simply to see the strategy trades highlighted on the chart. For more information visit: http://backtestingblog.com/code/macd-divergences/

Figure 24 - TradeStation screenshot of the MACD Divergence strategy and RadarScreen

http://www.backtestingreport.com/MACD_on_BestFreeCharts.pdf

http://www.freestockcharts.com/

http://www.yahoo.com/

http://backtestingblog.com/code/macd-divergences/


Understanding Technical Indicators Made Easy with BackTesting Report

BTR1: Baseline (Free Bonus Report) Establishes a standard for comparison for the US Stock market from 1994 - 2008. Brief reference filled with background info on backtesting and evaluating strategies.

Buying New Trends Series

BTR2: Trading Above the Moving Averages: Shows you when it made sense to wait for a market ripe for buying by highlighting which MAs

worked and which didn’t. BTR3: Price Crossing the MA: Learn simple ways to trigger an objective buy signal on a rising trend BTR4: Moving Average Crossovers Tests out the buy signals from this classic strategy. Plus a free bonus! Best of Moving Average Buy Signals, comparing the best signals from previous reports plus introducing a new strategy with promising results, especially for swing traders. This bonus is exclusively for BackTesting Report package customers. All four moving average issues are zipped into one download.

Custom Strategies and Scans

EasyLanguage® for TradeStation enables you to scan the markets for opportunities to use the strategies tested by BackTesting Report. Mark charts with the buy and sell signals taken by the most promising strategies. TradeStation strategies also support RadarScreen to scan a symbol list in real time. For example, you can save hours each day in identifying the elusive and powerful MACD divergences on US stocks.


WHAT WORKED, WHAT DIDN’T WORK AND HOW TO AVOID THE MISTAKES EVEN EXPERTS MAKE

BTR5: Anticipating the Cross with MACD Buy Signals Get-started guide explains the moving parts of the MACD, clearing up the mysteries of the multiple histograms. Pits MACD lines versus histograms to choose an entry signal. Popular parameter settings covered as well.

BTR6: Catching the Wiggles with MACD Sell Signals Backtests basic MACD signals - buys and sells - seeking the ways to capture profits from usual end-of-day action in the stock market.

BTR7: Missing Link Between MAs and MACD See how the 12/26 moving average crossover compares. This moving average combination is singled out because it forms the basis of the MACD.

BTR8: Finding Big Bottoms with MACD Divergences Get a handle on divergences between indicator and price. Explore the combination of MACD bullish divergences as buy signals and MACD bearish divergences as sell signals.

Related Reading The author’s current reading list is posted at http://backtestingblog.com/order/books/

Bibliography

Appel, Gerald. Master Class with Gerald Appel, Financial Trading Seminars, 2003. 2 Appel, Gerald. Technical Analysis: Power Tools for Active Investors, FT Press, 2005. Aronson, David. Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals, Wiley, 2007. 1Elder, Alexander. Trading for a Living, Wiley, 1993. Chuck LeBeau and David Lucas. Technical Traders Guide To Computer Analysis of the Futures Market, The Book Press, 1992. D.R Barton, Chuck LeBeau. Class notes of The Systems Development Workshop. Offered by Van Tharps Institute, 2007. Tharp, Van. Trade Your Way to Financial Freedom, 2nd edition, McGraw Hill, 2007. Wiessman, Richard L. Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis, Wiley Trading, 2005.

Videos

http://truthaboutmacd.com – free video on MACD technical indicator and in-depth video course

Software

MACD Divergence Detectors – scanners to automatically find several kinds of MACD divergence, see backtestingblog.com/code/macd-divergences/

TradeStation® – the backtesting engine used in this report, see tradestation.com

Web Sites

BackTestingBlog.com – background information on backtesting, including glossary Divergence-Alerts.com – daily alerts on MACD Divergences in stocks, ETFs and futures. Also tracks an ETF rotation investment strategy.

http://backtestingblog.com/order/books/

http://truthaboutmacd.com/

http://backtestingblog.com/code/macd-divergences/

http://www.backtestingblog.com/

http://backtestingblog.com/category/glossary/

http://divergence-alerts.com/

www.backtestingreport.com 30

Disclaimer By purchasing this report, you are agreeing to the following disclaimer:

Own Mountain Trading Company, its owners, directors, managers and officers, (“Own Mountain”), are not responsible for the success or failure of your decisions relating to any information presented in this report. The information presented in this report should be carefully considered and evaluated, before reaching a decision, on whether to use them.

This report contains comparisons, assertions, and conclusions regarding performance based on backtesting. Backtesting is the process of testing a trading strategy on prior time periods. When you backtest, the results achieved are highly dependent on the movements of the tested period. One should not assume that what happens in the past will happen in the future, and this assumption can cause potential risks for the strategy. Back-testing is not identical to live trading. As such the backtesting performance may differ from the actual performance. Markets are always changing and evolving. The market today can be very different from the market last year. The past performance does not equal future results.

There can be no assurance that any prior successes, or past results can be used as an indication of your future success or results. Results are based on many factors. Own Mountain has no way of knowing how well you will do, as we do not know you, your background, your work ethic, or your skills or practices. Therefore Own Mountain does not guarantee or imply that you will get rich, that you will do as well, or make any money at all. There is no assurance you will do as well. If you rely upon the information presented in this report; you must accept the risk of not doing as well. Any earnings or income statements, or earnings or income examples, are only estimates of what we think you could earn.

You are advised to do your own due diligence when it comes to making business decisions and all information should be independently verified by your own qualified professionals.

All businesses have unknown risks involved, and are not suitable for everyone. You could experience significant losses, or make no money at all. Use caution and seek the advice of qualified professionals. Check with your accountant, lawyer or professional advisor, before acting on this or any information

Own Mountain makes no express or implied claims that you will make money as a result of purchasing this report and using the information presented in this report.

You agree that Own Mountain is not responsible for any success or failure that you or your business may experience as a result of using the information presented in this report. You freely and of your own will risk any and all capital you may choose to spend in using the information. You will do so with skill and common sense. You will not hold Own Mountain Trading Company accountable in any way for any failure of the information to live up to your expectations.

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