MACD indicator Archives - Algorithmic and Mechanical Forex Strategies

Another Seasonal Trading Strategy

October 23, 2013 by Andrew Selby 1 Comment

It seems as thought the season of seasonal trading strategies is upon us. I am seeing quite a few different seasonal trading posts being published on a number of different quantitative trading blogs lately. The most recent one that stood out to me was by Jay from Jay On The Markets.

Jay’s strategy segments the best market seasons with the best market sectors and uses a MACD signal to enter and exit.

In his Seasonal Sector Trading System post, Jay takes an idea inspired by The Stock Trader’s Almanac and attempts to build a trading system out of it. He takes the almanac’s concept, adds a MACD timing signal, and then trades that strategy on sector-based funds. Here is how he explains it:

One system that I follow involves using the Almanac’s “Nasdaq’s Best Eight Months Strategy” with MACD Timing. However, instead of buying a stock index I focus on the top performing Fidelity Select Sector Funds.

Trading Jay’s system starts by tracking the MACD indicator using the values 8/17/9 on the Nasdaq Composite Index on October 1. A buy signal is generated when the fast line crosses the slow line. The next step is to identify the top performing sectors:

Then find the five top Fidelity Select sector funds. There are a number of different ways to do this. The method I use is to run AIQ TradingExpert Relative Strength report over the past 240 trading days. This routine looks at the performance off each fund over 240 trading days but gives extra weight to the most recent 120 days. You can use different variables, or you can simply look at raw price change over the previous 6 months to come up with a list of “Top Select Sector Performers.”

Once Jay identifies the top five sector funds, he purchases them the next day. I assume he buys them at the open and allocates 20% of his capital to each position. He then holds that position at least until June 1.

Starting on June 1st of the next year, track the action off the MACD indicator for the Nasdaq Composite Index using MACD parameter values of 12/25/9.
When the fast line crosses below the slow line – or if the fast line is already above the slow line on 6/1, then sell the Fidelity Select sector funds on the next trading day.

Jay backtested this strategy starting on October 1 of 1998 all the way through its exit in June 2013. Over that period, Jay’s system produced positive returns 14 out of 15 times. It also outperformed buying and holding the SPX during the same time periods 11 out of 15 times. Over that 15 year period, Jay’s system averaged a return of 14.1% and its worst year was -0.8%.

As you can see, this relatively simple system has registered a gain in 14 of the past 15 “bullish” eight month periods. On average it has outperformed the S&P 500 by a factor of 2.27-to-1.

Jay concludes his article by reminding us that while this strategy has outperformed a buy and hold approach on average for the past 15 years, that certainly does not guarantee that it will continue to be profitable this year.

Testing Sy Harding’s Seasonal Timing Strategy

October 13, 2013 by Andrew Selby Leave a Comment

A recent article from CXO Advisory Group took an interesting look at Sy Harding’s Seasonal Timing Strategy. The CXO piece set out to evaluate the robustness of the impressive returns that had been previously published about the system.

A previous article had documented that combining an annual entry time around October 16 and an annual exit time around April 20 with a MACD indicator could outperform a buy and hold approach. That article stated that testing this strategy on the Dow Jones Industrial Average from 1999 through 2012 produced a total return of 213%, while buying and holding returned only 93% over that same period.

Sy Harding’s Seasonal Trading Strategy combines historic seasonal data with the MACD indicator.

CXO looked to test the robustness of this strategy by backtesting it on the SPY all the way back to 1993. They used the following rules and assumptions:

Calculate MACD for SPY using the Exponential Moving Average (EMA) template at StockCharts.com as the difference between the 26-day EMA price and the 12-day EMA price. A bullish (bearish) crossover occurs when MACD moves above (below) its 9-day EMA.

For each calendar year, sell SPY at the close on April 20 if MACD is bearish or otherwise at the close on the first day with a bearish MACD after April 20. If April 20 is not a trading day, shift to the last trading day before April 20.

For each calendar year, buy SPY at the close on October 16 if MACD is bullish or otherwise at the close on the first day with a bullish MACD after October 16. If October 16 is not a trading day, shift to the last trading day before October 16.

To maximize sample size, assume the strategy is in the market at the beginning of the sample period (1/29/93).

When out of the market, assume a return on cash equal to the contemporaneous T-bill yield.

For comparison, construct a separate scenario based on seasonal entry/exit only, unmodified by a MACD signal.

Use SPY buy-and-hold as a benchmark.

Ignore tax implications of trading semiannually.

Testing a buy and hold strategy against a seasonal strategy with and without the MACD indicator, the found the following results:

Terminal values are $561,156, $479,770 and $508,057 for SPY, Seasonal-MACD and Seasonal Only, respectively. The cumulative return for buying and holding SPY is the highest most of the time, but also the most volatile. MACD adjustments are somewhat disadvantageous compared to a seasonal only strategy. Notable points are:

The Seasonal Timing Strategy tends to underperform (outperform) buy-and-hold during bull (bear) markets.

Whether or not the Seasonal Timing Strategy beats buy-and-hold based on terminal values is sensitive to the start and stop dates for the return calculations. The Seasonal Timing Strategy would win a competition during the bad decade of the 2000s.

Further analysis of their results showed that the Seasonal Timing Strategies main strengths were that they outperformed the buy and hold strategy significantly in the very bad years. However, the strategies underperformed buy and hold during the best years.

CXO Advisory Group’s testing reveals some major flaws in Sy Harding’s Seasonal Timing Strategy, however they also point out that there are some other components that should be considered:

Sample size is small in terms of number of bull and bear markets, and test results therefore vary considerably for different start and stop dates.
As noted, tests ignore potential impacts of seasonal trading on capital gains taxes.

Simple 200 SMA MACD System

April 15, 2013 by Andrew Selby Leave a Comment

Simple is better, especially for the beginning trader. It is more important to know a few indicators inside and out than it is to know very little about every indicator.

With that idea in mind, let’s look at a very simple system that uses just one indicator, the MACD.

The 200 SMA MACD System

One of the most basic systems that uses the MACD indicator is the MACD/200 SMA system. This system uses the 200 period Simple Moving Average (SMA) to determine which direction the long term trend is moving, and then uses the MACD/Signal Line crosses to determine entry and exit points.

If the market being traded is trading above the 200 SMA, then any time the MACD Line crosses above the Signal Line is considered a buy signal. Anytime the MACD Line crosses below the Signal Line creates a sell to exit signal.

Reverse the signal rules if the market trades below the 200 SMA. The MACD line crossing below the Signal Line is considered a short signal. An up cross signals that the trader needs to cover the position.

Trading Rules

Chart and Instrument: Any
Period: Any
Market Condition: Trend

Go long when:
Price closes > 200 SMA
MACD crosses up

Go short when:
Price closes < 200 SMA
MACD crosses down

Exit long when:
MACD crosses down

Exit short when:
MACD crosses up

Strategy Analysis

Adding the 200 SMA enables the system to ride major trends. It makes sure that you won’t be shorting a market that is in a strong uptrend, or buying a market that has been declining.

While this adds some security, the system will still struggle during non-trending periods. This could cause quite a bit of whipsaw action during sideways trending markets.

Edward wrote about creating a specialist Expert Advisor on Friday. This SMA-MACD system is a perfect example of why it’s so hard to create a jack of all trades strategy.

You know where this strategy makes money – in trends. Apply the high level filter yourself when trading. Is this market trending? If yes, apply the strategy. If not, then don’t. They are simple rules for a complex world.

The S&P 500 ETF SPY from November until the present

If we use the chart of the SPY above as an example, the system would have given a buy signal in late November, right after the SPY broke above the 200 day simple moving average. The system would have logged some nice profits before generating a sell signal as the market pulled back at the end of the year.

After about one week on the sidelines, the system would have generated another buy signal as the market exploded to start the year. It would then catch the big move during the entire month of January, then gone to cash in February.

After avoiding the pullback at the end of February, there was a buy signal that captured the strong trend during the first two weeks of March, then a sell signal for the second half of March. The system then generated another buy signal in early April.

Demonstrating that this system works during a four month stretch of a strongly trending market does not mean this is a proven strategy. You know from the strategy basics that it only works in trends. However, if you are looking to build a trading system, this makes for a simple and convenient starting point.

MACD Overview

As you can see, the MACD (Moving Average Convergence/Divergence) indicator draws below a normal chart and contains a histogram and two lines.

The black line, which is the slightly thicker line on most charts, is called the MACD Line. The default MACD Line represents the different between the 12 and 26 day Exponential Moving Averages. These are the first two variables that the trader can adjust. I recommend using the default EMAs to keep this system simple.

The second line is called the Signal Line. This is the third variable that the trader can adjust. It is normally a 9 day EMA. The histogram measures the difference between the two lines, which is why its value is zero when the lines cross.

The primary advantage of the MACD indicator is that it will lag the market action slightly less than a simple moving average crossover system. Like most indicators, there are times when the MACD performs very well, and there are times when it will generate a number of false signals. It can be an excellent tool when applied to trending markets, but offers little value in non-trending markets.