[jose]

MACD trading strategies analysis
Applying a methodical approach to profit/risk analysis

The MACD is probably the most popular Technical Analysis indicator after the venerable moving average.

There are probably an infinite number of ways in which the MACD may be incorporated into a trading strategy.
The following series of articles will attempt to analyze some of the most popular (and some unusual) ones, using a unique profit/risk analysis methodology explained in the following post.

All support for this topic will be found only at this thread - please post any technical questions, answers and suggestions there.




MACD strategies


TC-01

Basic MACD/zero crossovers.


TC-02

Basic MACD/SignalLine (MACDhist/zero) crossovers.


TC-03

Buy: MACD enters/exits overSold zone.
Sell: MACD enters/exits overBought zone.


TC-04

MACD/SignalLine crossovers above/below overBought/overSold zones.


TC-05

Buy: MACD higher troughs (below zero).
Sell: MACD lower peaks (above zero).




MACDH (MACD Histogram) strategies


TC-06

MACDH / MACDH SignalLine crossovers.


TC-07

Buy: MACDH enters/exits overSold zone.
Sell: MACDH enters/exits overBought zone.


TC-08

MACDH/SignalLine crossovers above/below overBought/overSold zones.


TC-09

Buy: MACDH higher troughs (below zero).
Sell: MACDH lower peaks (above zero).




MACDH2x (MACD Histogram Histogram) strategies


TC-10

Buy: MACDH2x enters/exits overSold zone.
Sell: MACDH2x enters/exits overBought zone.


TC-11

Buy: MACDH2x higher troughs (below zero).
Sell: MACDH2x lower peaks (above zero).




Trading without price noise (some surprises here)


TC-01 --> TC-11



TC-12:
Index-based MACD with security-price contrarian strategy

Buy: Index.based MACD above overSold and security price below 4-day TriMA lower band.
Sell: Index-based MACD below zero and security price above 4-day TriMA upper band.[/div]



Notably absent from these 12 (23) MACD-based techniques above is
MACDH-price divergence, which is not only difficult to program, but also a tough one to incorporate successfully into a profitable trading strategy, as divergence signals of any kind should only be traded when the underlying trend is reasonably known.

TC being the premier MetaStock forum, we will be following the testing of these strategies with the help of MetaStock.

To install the TC MACD kit used throughout these articles, please download & unzip the setup file found here.
The setup file will automatically install the kit's 56 formulae & templates (for MetaStock EOD v8.01 or later, MetaStock Pro v8.0 or later). The setup file includes instructions and a full list of all password-protected formulae (all named "TC MACD ..."). After setup, you will need to edit the data path to your main index location within the "TC MACD - Index path" indicator, as described here.

The complete TC MACD kit free from any formula protection is available from MetaStockTools.com for US$300, and is also available to all Traders' Consortium Premium Members at no cost from the TC's Exclusive Downloads section.

For members who don't use MetaStock or are newcomers to this powerful charting software, the profit/risk analysis charts & results should prove equally compelling with or without MetaStock.

So buckle up, and get ready for the first and only comprehensive profit/risk analysis of MACD-based trading strategies.


jose '-)

[jose]

Defining Profit & Risk

Profit (green plot on chart above) can be defined as any historically accumulated net wealth gains (expressed in percentage terms), net being after all trade transaction costs are considered.
A total of 0.2% brokerage and price slippage is used, but this should be adjusted up or down according to the market traded.
These historical profit results may or may not repeat in the future, but are a good indication of each strategy's overall profitability.

Risk here (yellow plot on chart) is defined as historical accumulated losses expressed in percentage terms.
These historical losses may or may not repeat in the future, but are also a good indication of the overall risk involved in trading the particular strategy.


Risk

Risk and drawdown % basically measure the same: the possibility of losing trade capital. Historical drawdown based on an appropriate test period is probably the best way to determine possible future risk.

Cumulative drawdowns (historical risk) for the TC MACD strategies will be measured from profit equity curve peak to trough.

Risk is traditionally measured using Standard Deviation, such as used in the Sharpe ratio formula.
Sharpe ratio and other popular methods of measuring risk don't seem to take into account real-world risk. They are an industry standard as used by many managed funds, but perhaps they under-report true risk. It is possible to show a reasonable Sharpe ratio which may include a disastrous drawdown in the trading record.

Profit/Loss ratios fail as losses increase.
For example, let's take a strategy that experienced 400% gains with 100% interim losses. In the real world, our trading would end as losses became unacceptable to our own risk profile, but even if we persevered with trading until the 100% drawdown was reached, our final trading account balance would not reflect the Profit/Loss ratio of 4:1.

Unless we have access to a constant stream of trading capital, drawdowns tend to be "sticky". That is to say, that a 100% drawdown is fatal & final to a trader's capital, regardless of the amount of smoothing/massaging done to historical risk using Nobel prize winning risk formulae. ;)


Some traders measure risk annually or even monthly. Unfortunately drawdowns tend to be either partially or fully cumulative, so even a low monthly drawdown can be carried over and add up from month to month to a capital-breaking major drawdown. Smoothing or isolating yearly/monthly risk leads to the mistaken belief that trading is a relatively safe pastime. Some managed funds tend to measure risk this way, perhaps deliberately in order to present a safer picture to their clients.


There are many complex ways of measuring risk, but a straight-forward measure of historical drawdown is the best indicator of potential risk ahead.

Maximum historical drawdowns (rather than monthly/annual) should always be used as a yardstick when comparing returns, as these can then be compared to historical profits. For example, if any past maximum cumulative drawdown period brought losses of 40% then this amount of possible future risk should be considered when allocating capital to that particular strategy.

[jose]

Backtesting & performance comparison methodology
Comparing strategies with different risk profiles

Imagine we were given two choices for our capital investment:

Investment #1 - Bank account, 5%pa returns with approx 1% risk (bank/currency failure) of losing our whole capital;
Investment #2 - Lottery tickets, 10,000% return with approx 99.9999% risk of losing our capital.


Given the low risk, most investors would probably not lose much sleep about depositing all their whole capital into an interest-bearing bank account.
Most rational (risk-adverse) investors would immediately see the risk involved with Investment #2, and would naturally adjust their risk exposure by investing only a fraction of their capital on a lottery chance. This is essentially what risk management is all about.

So, how do we adjust for risk when trading? Basically, we adjust our exposure to risk by adjusting trade (position) size.
When we trade, we are exposed to capital risk originating from both the trading strategy as well as from each security's volatility. A safer trading strategy applied to an erratically volatile security may be more hazardous to our capital than applying a riskier strategy to a less volatile security.


This leads to the question:
How can we directly compare strategies with different risk profiles?
For example, which would be the better strategy, one that has averaged 50% profits with 30% drawdowns, or another that has made 20% with 10% risk?

These series of TC MACD strategy analysis will use risk-adjusted returns in order to enable a valid comparison of returns based on the same level of risk, to a maximum 30% historical drawdown. For the 50/30% & 20/10% example above, we would increase capital (exposure) on the second strategy to meet 30% risk, so that its risk-adjusted returns would now be 60% (i.e., making it a potentially better trading choice than the first strategy).

We will also be comparing risk-adjusted returns to a risk-adjusted Buy & Hold benchmark, in order to remove survivorship and market trend biases.

Backtesting for each strategy will include the current market's volatility, and will be based on (almost) 500 stocks in the ASX All Ordinaries for an average nine-year trading period beginning sometime in mid-1998. Median (as opposed to average) risk-adjusted profit results will be used to determine a representative cross-section of each strategy's performance over the universe of All Ords stocks.


Median vs Average

Averages tend to bring up skewed results when using either a small and/or irregular data sample.
For example, put 10 guys in one room and determine their average annual income. One of these guys is Bill Gates from Microsoft, earning $4 billion a year, and the other nine guys earn around $50,000 pa.
The average annual income of this population sample would be around $400 million, whereas a median would be a more realistic $50,000.


Determining median risk-adjusted profit

With the aid of the TC MACD kit's explorations, we will be able to determine representative median (30%) risk-adjusted profit results for all backtested strategies, enabling a valid comparison between them and Buy & Hold.
To find the median risk-adjusted profit result for each TC MACD strategy, run the appropriate exploration and do the following with the exploration's report:





1) Click on column D's 30% Adjusted Profit header to rank backtest results by risk-adjusted profitability order.





2) Select the approximate middle profit % result.




3) Adjust and select the median security result by clicking again on the column header (and reversing the profitability order) until this process does not change the middle ranking position of the selected security.

[jose]

Risk-adjusted Buy & Hold
B&H - more risk than meets the eye

Buy & Hold is an excellent benchmark with which to compare any strategy's performance against. It is also a useful metric to remove the considerable survivorship and trend biases found in most backtesting procedures.


One often hears this question:
"Does the strategy's performance beat Buy & Hold?"
What seems like a valid question at first glance, it fails in the sense that Buy & Hold's stop-less considerable risk is not taken into account, as the sample price/profit/drawdown Buy & Hold chart above shows.

Let's take a look at a simple comparison between a fictitious strategy and Buy & Hold:

Buy & Hold
Historical profit: +100%
Max hist drawdown: 50%

Strategy X
Historical profit: +60%
Max hist drawdown: 20%

Strategy X (+60%) does not seem to "beat" Buy & Hold's performance (+100%)... unless we take risk (drawdowns) into account, and adjust our exposure to the market through position sizing.
If our tolerance to risk was say, a maximum of 30% total drawdowns, we would need to adjust our exposure to Buy & Hold's excessive risk by adjusting its trade position size to 60% (30/50), resulting in a net profit of 60%. Similarly, we would do the same for strategy X's lower risk, with an increased position size of 150% (30/20) resulting in a net profit of 90%. Which is the more profitable strategy now?


The TC MACD trading strategy analysis uses 30% risk-adjusted backtest results in order to present a fair performance comparison between the 23 MACD-based strategies and Buy & Hold. In other words, profits are risk-adjusted to a 30% drawdown threshold.

All strategies were tested on 481 ASX All Ords stocks for the 10-year period ending on 31st August 2007, using EOD data from PremiumData's excellent service.
For easy comparisons, all Entry & Exit signals were taken on the Close of the signal day.
Total transaction costs (brokerage + price slippage) of 0.2% were used, which should be increased when testing more volatile/illiquid markets, or decreased when applying to high liquidity and/or low transaction cost markets such as the forex.
Fixed-trade size is used (i.e. no compounding) to avoid any exponential skewing of profit & loss results.
All results are based on median rather than average results on the universe of 481 securities, as explained in the previous post.


Buy & Hold performance

Median Historical Profit: +124.6%
Median Maximum Historical Drawdown: 53.3%
Median 30% max Risk-Adjusted Profit: +83.8% (approx 9%pa)
Time in Market: 100%
Potential Risk-Adjusted Profit: +83.8%
Median backtest period: 9.6 years


Buy & Hold's 30% risk-adjusted profit of +83.8% will be used as the benchmark for all strategies' risk-adjusted performance.

[jose]

Time spent in/out of markets

In my post above I've neglected to mention an additional and important consideration when comparing profit/risk results to Buy & Hold: % of time spent in a trade.

Buy & Hold effectively means that the trading capital is tied up in the markets 100% of the time, whereas a trading strategy may be active (for example) 50% of its time trading a given security. What this means in real terms, is that the trading capital can be recycled and generally put to work close to 100% of the time by trading another security once an exit signal has been given on the current trade.

This results in the possibility that, although the median security's risk-adjusted profit result for a given strategy may be (for example) +60%, if on average it spends only 50% of the time actively in each trade, then there is a chance to reinvest capital in other securities at other times, resulting in a potential overall profit of +120% (60%x2).

I have updated the TC MACD kit to show this additional information (% of time spent in avg trade) in the TC MACD explorations.
For those who have downloaded and installed the TC MACD kit prior to 30th August 2007, please download it again here (or for Traders' Consortium Premium Members here), and allow the setup file to overwrite existing TC MACD formulae in MetaStock.

[jose]

TC MACD - 01
Basic MACD/zero crossover signals

MACD/zero crossovers are likely to be the most basic and popular MACD-based strategy - enter a trade Long when the MACD crosses above zero, and exit when it crosses down. Since the MACD measures price momentum, when it is above zero then momentum is positive, and negative when below zero. Like most momentum-based strategies, this works best on sustained price trends, so this kind of strategy tends to get whipsawed (chopped up) in sideways markets.


TC MACD - 01 backtest stats:

Median Historical Profit: +78.5%
Median Maximum Historical Drawdown: 50.0%
Median 30% max Risk-Adjusted Profit: +48.7% (approx 5%pa)
Time in Trade: 53.9% of market time
Median Trade frequency: 3.9 trades pa
Potential Risk-Adjusted Profit: +90.3% (assuming time spent in market is 100%)
Risk-Adjusted Profit improvement over Buy & Hold: +6.6%


It's totally unexpected on my part to see this simple strategy "beat" Buy & Hold, although not by much.

[jose]

TC MACD - 02
Basic MACD/SignalLine (MACDhist/zero) crossovers.

The MACD/SignalLine crossover is also one of the most basic and popular MACD-based strategies - buy Long when the MACD crosses above its signal line (9-period EMA of MACD), and sell when the MACD crosses below its signal line. This is exactly the same as MACD Histogram / Zero line crossovers.

Again, like most momentum-based strategies, this works best on sustained price trends and will definitely get whipsawed in sideways markets.


TC MACD - 02 backtest stats:

Median Historical Profit: +19.4%
Median Maximum Historical Drawdown: 71.7%
Median 30% max Risk-Adjusted Profit: +8.7% (approx 1%pa)
Time in Trade: 49.3% of market time
Median Trade frequency: 9.9 trades pa
Potential Risk-Adjusted Profit: +17.6%
Risk-Adjusted Profit improvement over Buy & Hold: -66.2%


Awful stats, confirming my suspicion that MACD/SignalLine crossovers are very susceptible to whipsaws - note much higher avg trade frequency.

[jose]

TC MACD - 03
Buy: MACD enters overSold zone.
Sell: MACD enters overBought zone.

I often see requests for a MACD strategy where the MACD triggers a signal when it reaches a certain level.
This does not work with the MACD, as its scale depends mostly on the security's own price scale - i.e., identical price charts with different scales (e.g. Dow Jones Index and $1 stock) will produce identical-looking MACDs on different scales. In other words, it is not possible to use actual MACD levels as these change from chart to chart (and within a chart), and are thus meaningless.

There are ways to normalize the MACD levels, but this leads to "clipping" and other distortions of the original MACD plot.
The TC MACD uses another approach: it leaves the MACD intact, and introduces overbought/oversold levels which adapt to the MACD's past levels and volatility.

The TC MACD - 03 buys Long when the MACD crosses down into the overSold zone, and sells Long when the MACD crosses up into the overBought zone. There are options in the TC MACD - 03 indicator to enter/exit at later stages, and/or to reverse signals.


TC MACD - 03 backtest stats:

Median Historical Profit: +35.2%
Median Maximum Historical Drawdown: 42.8%
Median 30% max Risk-Adjusted Profit: +26.0%
Time in Trade: 42.6% of market time
Median Trade frequency: 1.4 trades pa
Potential Risk-Adjusted Profit: +61.0%
Risk-Adjusted Profit improvement over Buy & Hold: -22.8%


As it stands, signals based on overBought/Sold levels of the MACD don't do that well. There may be a better implementation of these levels in the next MACD strategy.

[jose]

TC MACD - 04
MACD/SignalLine crossovers above/below overBought/Sold zones.

This MACD-based simple strategy is based on a combination of the previous two strategies:
Buy Long on a MACD/SignalLine crossover when it occurs within the MACD overBought zone, and sell on a SignalLine/MACD crossover if it occurs within the MACD overSold zone.


TC MACD - 04 backtest stats:

Median Historical Profit: +77.7%
Median Maximum Historical Drawdown: 35.8%
Median 30% max Risk-Adjusted Profit: +63.5%
Time in Trade: 56.0% of market time
Median Trade frequency: 0.4 trades pa
Potential Risk-Adjusted Profit: +113.4%
Risk-Adjusted Profit improvement over Buy & Hold: +29.6%

This strategy not only improves on the previous two, but beats Buy & Hold on a time-in-trade and risk-adjusted basis - a good example of where the sum is greater than its parts.

TC MACD - 04 variation 1
Buy Long on MACD/SignalLine crossovers and sell on SignalLine/MACD crossovers, only when both occur within the MACD overSold zone.

Median Historical Profit: +106.2% (+156.9%)
Median Maximum Historical Drawdown: 53.4% (50.1%)
Median 30% max Risk-Adjusted Profit: +61.4% (+98.7%)
Time in Trade: 88.6% (89.3%) of market time
Median Trade frequency: 1.1 (0.6) trades pa
Potential Risk-Adjusted Profit: +69.3% (+110.5%)
Risk-Adjusted Profit improvement over Buy & Hold: -14.5% (+26.7%)

Most MACD/SignalLine crossovers occur in the MACD oversold zone, so it is not surprising that this strategy spends more time in the market.
Not an improvement (results in brackets are for an index-based MACD - more on this later).

TC MACD - 04 variation 2
Buy Long on MACD/SignalLine crossovers when they occur within the MACD overSold zone.
Sell on SignalLine/MACD crossovers when they occur within the MACD overBought zone.

Median Historical Profit: +20% (+48.8%)
Median Maximum Historical Drawdown: 43.5% (31.3%)
Median 30% max Risk-Adjusted Profit: +20.8% (+52.9%)
Time in Trade: 40.5% (26.3%) of market time
Median Trade frequency: 1 (1) trade pa
Potential Risk-Adjusted Profit: +51.4% (+201.1%)
Risk-Adjusted Profit improvement over Buy & Hold: -32.4% (+117.3%)

A definite non-improvement.

TC MACD - 04 variation 3
Buy Long on MACD/SignalLine crossovers and sell on SignalLine/MACD crossovers, only when all signals occur within the MACD overBought zone.

Median Historical Profit: +4% (+5.4%)
Median Maximum Historical Drawdown: 20.7% (17.9%)
Median 30% max Risk-Adjusted Profit: +5.1% (+9.3%)
Time in Trade: 7.6% (7.4%) of market time
Median Trade frequency: 1.7 (2.3) trades pa
Potential Risk-Adjusted Profit: +67.1% (+125.7%)
Risk-Adjusted Profit improvement over Buy & Hold: -16.7% (+41.9%)

Another low-profit/low-risk strategy which performs unfavorably against Buy & Hold.


PS:
The originally-posted performance results for variations 1-3 (now in brackets) were (accidentally) based on an index-based MACD - more on this strategy later in the series.

[jose]

TC MACD - 05
Buy: MACD higher troughs (below zero line).
Sell: MACD lower peaks (above zero).

Peak/Trough definitions:
Peak: MACD's previous bar's value above current and 3rd bars, and previous bar below the MACD's zero line.
Trough: MACD's previous bar's value below current and 3rd bars, and previous bar below the zero line.

This strategy buys Long when the MACD's current trough value is higher than the previous trough's, and sells when the current peak value is lower than the previous peak's.


TC MACD - 05 backtest stats:

Median Historical Profit: +23.6%
Median Maximum Historical Drawdown: 49.0%
Median 30% max Risk-Adjusted Profit: +16.3%
Time in Trade: 43.4% of market time
Median Trade frequency: 3 trades pa
Potential Risk-Adjusted Profit: +37.6%
Risk-Adjusted Profit improvement over Buy & Hold: -46.2%


A surprisingly poor result - probably due to ineffective exits when the MACD takes a dive without forming any warning peaks.

[jose]

TC MACD - 06
MACD Histogram / MACDH SignalLine crossovers.

This is the first of the MACD Histogram (MACDH) - based strategies.
The MACDH plots the difference between the MACD and its own 9-period EMA signal line. I've added a 9-period EMA signal line of the MACDH in order to backtest MACDH/SignalLine crossovers.


TC MACD - 06 backtest stats:

Median Historical Profit: -3.1%
Median Maximum Historical Drawdown: 76.8%
Median 30% max Risk-Adjusted Profit: -2.1%
Time in Trade: 49.8% of market time
Median Trade frequency: 14.7 trades pa
Potential Risk-Adjusted Profit: -4.2%
Risk-Adjusted Profit improvement over Buy & Hold: -88%


These poor backtest stats are the result of a very busy strategy that suffers from excessive whipsaws. We may be able to improve on it later, and/or we may also be able to incorporate this strategy into a more successful one as was accomplished with TC MACD - 04.

[jose]

TC MACD - 07
Buy: MACD Histogram (MACDH) enters overSold zone.
Sell: MACDH enters overBought zone.

This strategy buys Long when the MACDH crosses down into the overSold zone, and sells when it crosses up into the overBought zone.
Backtest variations of these entry/exit rules (cross up out of overSold zone, etc) can be tried by TC members with the unprotected version of the TC MACD kit.


TC MACD - 07 backtest stats:

Median Historical Profit: +70.9%
Median Maximum Historical Drawdown: 43.5%
Median 30% max Risk-Adjusted Profit: +49.5%
Time in Trade: 50.4% of market time
Median Trade frequency: 3.8 trades pa
Potential Risk-Adjusted Profit: +98.2%
Risk-Adjusted Profit improvement over Buy & Hold: +14.4%


This technique often finds price peaks and troughs, and is very promising - more so than the TC MACD - 03 identical strategy based on the MACD.

[jose]

TC MACD - 08
MACDH/SignalLine crossovers above/below overBought/Sold zones.

This MACDH-based strategy is based on a combination of the previous two strategies, and apart from the use of the MACDH instead of the MACD, it is identical to TC MACD - 04's variation 2:

Buy Long on MACDH/SignalLine crossovers when they occur within the MACDH overSold zone.
Sell on SignalLine/MACDH crossovers when they occur within the MACDH overBought zone.

TC MACD - 08 backtest stats:

Median Historical Profit: +46.8%
Median Maximum Historical Drawdown: 47.8%
Median 30% max Risk-Adjusted Profit: +31.1%
Time in Trade: 50.3% of market time
Median Trade frequency: 1.7 trades pa
Potential Risk-Adjusted Profit: +61.8%
Risk-Adjusted Profit improvement over Buy & Hold: -24.6%

This strategy does not improve on the MACD equivalent, perhaps due to whipsaws from the 4x trades pa as a result of the more volatile MACDH.

TC MACD - 08 variation 1
Buy Long on MACDH/SignalLine crossovers and sell on SignalLine/MACDH crossovers, only when both occur within the MACDH overSold zone.

Median Historical Profit: +91.2%
Median Maximum Historical Drawdown: 54.4%
Median 30% max Risk-Adjusted Profit: +59.1%
Time in Trade: 83% of market time
Median Trade frequency: 1.2 trades pa
Potential Risk-Adjusted Profit: +71.2%
Risk-Adjusted Profit improvement over Buy & Hold: -12.6%

A slight improvement, but not good enough.

TC MACD - 08 variation 2
Buy Long on a MACDH/SignalLine crossover when it occurs within the MACDH overBought zone.
Sell on a SignalLine/MACDH crossover if it occurs within the MACDH overSold zone.

Median Historical Profit: +44.1%
Median Maximum Historical Drawdown: 36.2%
Median 30% max Risk-Adjusted Profit: +35%
Time in Trade: 42.1% of market time
Median Trade frequency: 0.6 trades pa
Potential Risk-Adjusted Profit: +83.1%
Risk-Adjusted Profit improvement over Buy & Hold: -0.7%

Very few trades, for a slight improvement over other TC MACD - 08 versions.

TC MACD - 08 variation 3
Buy Long on MACDH/SignalLine crossovers and sell on SignalLine/MACDH crossovers, only when all signals occur within the MACDH overBought zone.

Median Historical Profit: +5.7%
Median Maximum Historical Drawdown: 21.3%
Median 30% max Risk-Adjusted Profit: +11%
Time in Trade: 9.2% of market time
Median Trade frequency: 1 trade pa
Potential Risk-Adjusted Profit: +119.6%
Risk-Adjusted Profit improvement over Buy & Hold: +35.8%

Another low-profit/low-risk strategy, which probably won't be able to reach its potential profit due to the very small amount of time spent in the markets.

[jose]

TC MACD - 09
Buy: MACDH higher troughs (below zero).
Sell: MACDH lower peaks (above zero).

This strategy is identical to the TC MACD - 05, but uses the MACD Histogram in place of the MACD.

Peak/Trough definitions:
Peak: MACDH's previous bar's value above current and 3rd bars, and previous bar below the MACDH's zero line.
Trough: MACDH's previous bar's value below current and 3rd bars, and previous bar below the zero line.

This strategy buys Long when the MACDH's current trough value is higher than the previous trough's, and sells when the current peak value is lower than the previous peak's.


TC MACD - 09 backtest stats:

Median Historical Profit: +33.1%
Median Maximum Historical Drawdown: 53.3%
Median 30% max Risk-Adjusted Profit: +18.6%
Time in Trade: 49.1% of market time
Median Trade frequency: 6.1 trades pa
Potential Risk-Adjusted Profit: +37.9%
Risk-Adjusted Profit improvement over Buy & Hold: -45.9%


Not much of an improvement over the MACD-based same strategy, due mostly to the higher trade rate.

[jose]

TC MACD - 10
Buy: MACD Histogram Histogram (MACDHx2) enters overSold zone.
Sell: MACDHx2 enters overBought zone.

This strategy introduces the MACD Histogram Histogram (MACDHx2), which is the difference between the MACD Histogram Histogram and its own 9-period EMA signal line.
Apart from the use of the MACDHx2 instead of the MACD or MACDH, the methodology used here is identical to the TC MACD - 03 and TC MACD - 07 strategies - it buys Long when the MACDHx2 crosses down into the overSold zone, and sells when it crosses up into the overBought zone.


TC MACD - 10 backtest stats:

Median Historical Profit: +84%
Median Maximum Historical Drawdown: 42.4%
Median 30% max Risk-Adjusted Profit: +58.8%
Time in Trade: 49.6% of market time
Median Trade frequency: 5.8 trades pa
Potential Risk-Adjusted Profit: +118.5%
Risk-Adjusted Profit improvement over Buy & Hold: +34.7%


As we progress with this method (overBought/overSold) from the MACD to the MACDH and now the MACDHx2, this strategy seems to become potentially more and more profitable. Hmmm... Perhaps some day we should test the MACDHx3. ;)

[jose]

TC MACD - 11
Buy: MACDH2x higher troughs (below zero).
Sell: MACDH2x lower peaks (above zero).

This strategy is identical to TC MACD - 05 & TC MACD - 09 strategies, but uses the MACDH2x instead of the MACD & MACDH.

Peak/Trough definitions:
Peak: MACDH2x's previous bar's value above current and 3rd bars, and previous bar below the MACDH2x's zero line.
Trough: MACDH2x's previous bar's value below current and 3rd bars, and previous bar below the zero line.

This strategy buys Long when the MACDH2x's current trough value is higher than the previous trough's, and sells when the current peak value is lower than the previous peak's.


TC MACD - 11 backtest stats:

Median Historical Profit: +31.8%
Median Maximum Historical Drawdown: 55.8%
Median 30% max Risk-Adjusted Profit: +18.4%
Time in Trade: 49% of market time
Median Trade frequency: 8.2 trades pa
Potential Risk-Adjusted Profit: +37.6%
Risk-Adjusted Profit improvement over Buy & Hold: -46.2%


This strategy is consistently not worth considering trading on its own.

[jose]

TC MACD - 01~11 summary

					Historical	  Max Hist	   30% Risk	  Time %   Trades/year   Improvement   Possible
Strategy		  Profit	   DrawDown	 Adjusted	 in trade	frequency	   on risk-adj		 real
																Profit						 average		Buy & Hold	improvement

Buy & Hold   +124.6%		53.3%		+83.8%		100%	  (9.6 years)	  (8.7%pa)			---

TC-01			+78.5%		50.0%		+48.7%		53.9%		   3.9			 -35.1%			+6.6%

TC-02			+19.4%		71.7%		  +8.7%		49.3%		   9.9			 -75.1%		   -66.2%

TC-03			+35.2%		42.8%		+26.0%		42.6%		   1.4			 -57.8%		   -22.8%

TC-04			+77.7%		35.8%		+63.5%		56.0%		   0.4			 -20.3%		  +29.6%	<---=

TC-05			+23.6%		49.0%		+16.3%		43.4%		   3.0			 -67.5%		   -46.2%

TC-06			   -3.1%		76.8%		   -2.1%		49.8%		 14.7			 -85.9%		   -88.0%

TC-07			+70.9%		43.5%		+49.5%		50.4%		   3.8			 -34.3%		  +14.4%

TC-08			+46.8%		47.8%		+31.1%		50.3%		   1.7			 -52.7%		   -24.6%

TC-09			+33.1%		53.3%		+18.6%		49.1%		   6.1			 -65.2%		   -45.9%

TC-10			+84.0%		42.4%		+58.8%		49.6%		   5.8			 -25.0%		  +34.7%	 <---=

TC-11			+31.8%		55.8%		+18.4%		49.0%		   8.2			 -65.4%		   -46.2%

For simple price-based single-indicator strategies, TC MACD - 10 seems the most promising after adjusting backtest results for time spent in market.
Honorable mention: strategies TC MACD 1/4/7.
Although the remaining strategies fail to improve on Buy & Hold, they have the potential to be profitable if included as part of an existing strategy.


jose '-)

[jose]

Initially I had plans to post several articles further explaining the concept of basing the signals and risk-adjusted backtesting process of the TC MACD 01~11 strategies on a major index (ASX 200) instead of price.

Unfortunately scarce resources (i.e. zero free available time) cannot warrant the time required to satisfy a lack of general interest/feedback in this powerful risk management/backtesting technique. Therefore, I'll post the index-based TC MACD results below and let TC members draw their own conclusions based on the stats.

Index-based (ASX 200) TC MACD - 01~12 summary

					Historical	  Max Hist	   30% Risk	  Time %   Trades/year   Improvement   Potential
Strategy		  Profit	   DrawDown	  Adjusted	 in trade	frequency	   on risk-adj		 real
																Profit						  average		Buy & Hold	improvement

TC-01			+131.8%		47.2%		+85.0%		67.2%		  3.8			  +1.2%		   +42.7%	<---=

TC-02			+110.2%		41.4%		+77.5%		50.9%		 10.4			  -6.3%		   +68.5%	<---=

TC-03			 +14.2%		44.2%		+10.2%		32.0%		   1.2			 -73.6%		   -51.9%

TC-04			 +67.1%		40.6%		+54.7%		56.0%		   0.3			 -29.1%		   +13.9%
var-1			+156.9%		50.1%		+98.7%		89.3%		   0.6			 +14.9%		   +26.7%
var-2			 +48.8%		31.3%		+52.9%		26.3%		   1.0			 -30.9%		  +117.3%	<---=

TC-05			 +30.5%		45.7%		+21.2%		38.4%		   3.0			 -62.6%		   -28.6%

TC-06			 +79.2%		45.9%		+47.8%		48.8%		 13.8			 -36.0%		   +14.2%

TC-07			 +34.2%		54.8%		+18.2%		50.5%		   3.9			 -65.6%		   -47.8%

TC-08			 +40.7%		41.1%		+28.8%		41.9%		   1.6			 -55.0%		   -15.1%

TC-09			 +48.5%		53.7%		+27.0%		52.1%		   6.1			 -56.8%		   -32.0%

TC-10			 +22.2%		56.3%		+14.2%		47.0%		   6.1			 -69.6%		   -53.6%

TC-11			 +54.6%		47.3%		+35.7%		46.5%		   7.8			 -48.1%			-7.0%

TC-12			+141.9%		49.3%		+93.2%		75.2%		  4.8			   +9.4%		  +40.1%	<---=

jose '-)