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Comparing MACD Strategies and a Volume-Volatility Indicator in US Stocks

Article arXiv papers · Author: Pat Tong Chio
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Summary

This thesis backtests strategies built around the conventional MACD settings of 12, 26, and 9 on stocks represented in the Dow Jones, Nasdaq, and S&P 500. It evaluates win rate, profitability, Sharpe ratio, trade count, and maximum drawdown over a period spanning 2015 through August 2021. The comparisons include MACD alone and combinations with momentum indicators such as the Money Flow Index and Relative Strength Index.

The reported win rate for MACD alone is below 50%, while combinations with other momentum indicators improve it. The author then modifies the MACD formula to incorporate trading volume and daily price volatility, naming the resulting indicator VPVMA. The thesis reports improved win rate and risk-adjusted performance for the associated strategy, and says the tested strategies generated positive returns overall. These are backtest findings for the stated markets and period; the supplied description does not explain transaction costs, out-of-sample validation, or robustness checks, so the results do not by themselves demonstrate live trading performance.

Key ideas

  • The thesis compares standard MACD strategies with combinations involving MFI and RSI.
  • Its tests cover stocks associated with three major US indices from 2015 to August 2021.
  • MACD alone has a reported win rate below 50% in these tests.
  • Adding momentum indicators improves the reported win rate.
  • The proposed VPVMA incorporates trading volume and daily price volatility and is reported to improve win rate and risk-adjusted results.

Tags

EquitiesUS marketsTechnical indicatorsMomentumBacktesting
Full text
# A comparative study of the MACD-base trading strategies: evidence from the US stock market


# A comparative study of the MACD-base trading strategies: evidence from the US stock market









In recent years, more and more investors use technical analysis methods in their own trading. Evaluating the effectiveness of technical analysis has become more feasible due to increasing computing capability and blooming public data, which indie investors can perform stock analysis and backtest their own trading strategy conveniently. The Moving Average Convergence Divergence (MACD) indicator is one of the popular technical indicators that are widely used in different strategies. In order to verify the MACD effectiveness, in this thesis, I use the MACD indicator with traditional parameters (12, 26, 9) to build various trading strategies. Then, I apply these strategies to stocks listed on three indices in the US stock market (i.e., Dow-Jones, Nasdaq, and S&P 500) and evaluate its performance in terms of win rate, profitability, Sharpe ratio, number of trades and maximum drawdown. The backtesting is programmed using Python, covering the period between 01/01/2015 and 28-08-2021. The result shows that the win-rate of the strategy with only the MACD indicator is less than 50%. However, the win-rate is improved for the trading strategies that combine the MACD indicator with other momentum indicators like the Money Flow Index (MFI) and the Relative Strength Index (RSI). Based on this result, I redesign the MACD mathematical formula by taking the trading volume and daily price volatility into consideration to derive a new indicator called VPVMA. The results show that the win-rate and risk-adjust performance of this new trading strategy have been improved significantly. In general, the findings suggest that while all the MACD trading strategies mentioned above can generate positive returns, the performance is not good without using other momentum indicators. Hence, the VPVMA indicator performs better.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.