I Tested The MACD - Does It Actually Make Money?

i studied for the past seven days researching everything there is to know about the macd one of the most installed indicators of all time sure i knew a lot about this indicator already but did i really know it to its full potential i wanted to go as deep down the rabbit hole as possible and find every trick tip or as much information as i could about the specific indicator i watched hundreds of videos read tons of articles trying to learn as much as i could about the macd and to my surprise i actually learned a lot of stuff i didn't know before i even back tested the macd on real past market data to see if it lived up to all the hype and to see if it actually made money or not and just as a heads up i even back tested to see what the best settings were for the macd and just as a quick hint it's not the default settings so that's exactly why i wanted to make this video i don't want you guys to have to search through multiple videos like i did i'm making this one video so you can have the ultimate guide and learn everything there is to know about the macd from one single video the macd stands for moving average convergence divergence and was created by this guy gerald lapel in the 1970s what gerald was trying to achieve is to make an indicator show how strong or weak a market's momentum was indicated by the relative strength between two moving averages and to be honest he did a damn good job of doing that the macd has four main parts the macd line the signal line the histogram and the zero line it comes with a 12 day exponential moving average and a 26 day exponential moving average now these settings can be customized to whatever you want by default it's set to 12 and 26. this is foreshadowing if you couldn't tell then we have the histogram which represents the difference between the macd line and the signal line so for example the smaller the space between the two lines the smaller the histogram the larger the space between the two lines the larger the histogram you can also see once the macd line crosses above the signal line the histogram will automatically turn green if the macd line crosses below the signal line the histogram will turn red then finally we have the zero line which is represented at the zero level and will tell us the center of the macd indicator as you may already know there are tons of different strategies and ways to use the macd and i wanted to put each and every one of these strategies to the test to decipher not only how to use the macd but find out how we can use it to help predict market movement i asked you guys on instagram what your favorite way to use the macd was and surprisingly i got a lot of responses also if you're not following my instagram what are you doing so i decided to use the four most used strategies and decided to test them so here's what we're gonna do we're gonna first go through each of the four different strategies and show you guys exactly how to execute them and then i'm gonna actually test these strategies on real market data so we can see if they would have even actually made money or not almost kind of like a game show i'm gonna call it does this macd strategy really work or is it a money loser game show by trading lab the first strategy is probably one of the most common ways to use the macd the strategy is pretty simple you buy when the macd line crosses above the signal line in other words when the histogram turns green and then you're gonna sell when the macd line crosses below the signal line or when the histogram turns red the logic behind this is you're essentially buying when the short-term average is higher than the long-term average meaning there's a short-term momentum heading upwards so as an example you would have bought here because the macd line crosses above the signal line and you would have sold here because the macd line crosses below the signal line you can also do the same strategy for shorting just do the complete opposite the next strategy is to use the macd with divergence which basically means if the chart is heading upwards but the macd isn't making higher highs this means the market is slowly starting to lose momentum so this strategy can be really great to know when turning points in the market are about to happen so as an example the market is heading upwards here but if we take a look at the macd it's not making higher highs which is what it should be doing if the market is heading upwards like this so we can pretty much assume the market is losing momentum and the chart is about to head downwards which is what it does you can also do it the other way the market is heading downwards but at the same time the macd isn't making lower lows so we can assume there's about to be a reversal which there was the next strategy is trading off the extremes of the macd what i mean is whenever a market has huge amounts of momentum and goes upwards super fast almost always it heads back down at some point so we're trying to take advantage of that and whenever the macd hits an extremely high peak we're gonna look to short as it's got to lose its momentum at some point same thing if the market dips way too fast if there's a very low peak on the macd we can look to enter a long position as it's likely to move upwards after the fourth and final strategy is using the macd as a trend filter if you've watched any of my videos before you should definitely know by now i absolutely love trading with the trend we're trending up boys we are trending up what i mean by that is that i like taking long positions when the market is trending upwards and i like taking short positions when the market is trending downwards sounds like common sense right but believe it or not it's a lot harder to spot a trend with real-time market data than you might think so how can we tell when a market is in an uptrend or a downtrend so the steps for this strategy are as follows you first go to your preferred time frame whether that's the five minute one hour one day week whatever then you're going to open a separate tab and have your macd on one time frame higher so for example if your preferred time frame is the daily you would set your macd indicator to the one week time frame if the macd histogram is positive in green you look for long trades if it's negative in red you look for short trades now before you say it i already know these four strategies weren't made in a lab somewhere in germany and are super highly effective winning trading strategies that hedge funds use these strategies can be found on basically anywhere hell i bet even your uncle rob knows about them however you have to realize most of these websites or gurus that are telling you these strategies are trying to sell you something so in most cases they're either straight up lying to you inflating the results of the strategy or only telling you the positives so you go by their ebook or whatever they're trying to sell you well here's the thing i'm not trying to sell you anything as i am for the people [Music] i don't get any benefit from telling you the macd works or if it doesn't work so i'm going to be brutally honest and tell you the exact results i get from these various strategies on real market data no lies no fairy dust just good old plain statistics well before we talk about which strategy works we first have to understand why the macd may not work fair enough so going back to strategy one as a quick refresh this strategy was all about buying when the histogram turns green and selling when the histogram turned red so in this strategy the traders looking to turn bearish when the market's upward momentum weakens or turn bullish when the market's downward momentum weakens now when first hearing this i can already think of a critical issue around this style of thinking one just because a market has upwards momentum and its weakening doesn't necessarily mean it's done going upwards it could just be taking a little break markets need breaks too guys same thing with the market heading downwards just because the mark is slowing down the downwards momentum doesn't necessarily mean it's done going down so with this first strategy here's an example of it failing the market falls so the histogram turns red but then the macd turns bullish and the chart starts moving sideways but it was just a little pause and the market continues to fall downwards after moving on to strategy 2 where we use the macd's divergence to help spot reversals in the market here's the main issue with this one i found that divergence is kind of hard to quantify what i mean by that is whoever's trading is going off their opinion on what they see and as we all know the human eye is prone to seeing whatever it wants to see as an example this chart is moving upwards if you were bullish you could say yeah the smackdi's making higher highs so it's going to continue to head upwards or if you were bearish you could say oh this macd line is heading downwards giving us bearish divergence so this is the top it could easily be seen both ways which is definitely a problem in trading in a fast-paced market like the stock market moving on to strategy three this strategy was all about entering when the histogram was at very big peaks the thing about trading is extreme can easily become even more extreme it's extreme just because the histogram is very high doesn't necessarily mean it can't go higher and just because the histogram is very low doesn't mean it can't keep dropping then finally the last strategy i do have to save right off the get-go i have the least amount of doubt towards this strategy because there's actual data to back it up if you remember this trading strategy was moving the macd one time frame higher than you're trading at to make sure you're trading with the trend the one thing i will say about this is that if you watch my videos before i normally use the 200 exponential moving average to tell if a market is in an uptrend or a downtrend if price is above the moving average it's an uptrend if it's below it's a downtrend so why not just use that in order to tell which way the trend is heading now that we've looked at all the potential problems with the macd it's time to do the exciting stuff calculating and testing how successful the macd actually is now as a reminder forget everything that gurus and trading books have taught you in the past your job as a trader is to stay as objective as possible let's really just focus on the statistics and numbers from these results so there were four strategies that we talked about buy and sell in the macd crossover look for macd divergences use extreme macd readings to predict market tops and bottoms and then use the macd as a trend filter when finding trades now i've kind of ran into a problem i've decided to remove the second strategy the divergence one just because it's extremely objective and no two traders staring at the same chart will count the same exact divergences plus it's kind of hard to back test divergences i'm not lazy you're lazy so i decided to take it out of the results i also decided to ignore the fourth strategy as it really wasn't a complete trading strategy on its own as usually you would add different indicators on top the macd results please don't hate me so that leaves us with two strategies but i do promise you will still learn a lot from these two i'll be testing these strategies on three different markets the s p 500 gold and the us dollar index feel free to share your results if you tested it on a different market i just wanted to keep it simple with three different markets to keep this video short and juicy also so i don't get millions of comments like these time frame great video what time frame is applicable what is the time frame time frame how use time frame what time frame did you use for this strategy what is the time frame for this one day time frame right what time frame best i'll be using the daily time frame for these tests so first we're going to test the first strategy with the buy and sell macd crossover signals on the s p 500 so only entering a long position if the histogram was positive then a short strategy when the histogram was negative then i'm also going to be comparing it to if i just bought the s p 500 and just simply held throughout the years i should also mention these results were from 1928 to 2018. so as you can see with the bullish macd signals it actually somewhat worked while oddly enough the short only macd signals did not work too well which i found really interesting but while the bullish macd signals were close both of these strategies didn't do as well as just buying and holding the s p 500 but then we move on to gold and this is where it starts getting really interesting so if you did long only entries with the histogram you would have done pretty well as it actually outperformed if you just bought gold and held same thing with short entries though still positive but not as good as the other two then finally we have the us dollar index and how interesting is this the short only strategy did the best out of all three for this one then the long only strategy came in a close second place both way above the buy and hold results now we move on to the macd extreme strategy where we enter a trade based off the opposite extreme now this one was kind of difficult to test simply because it's very hard to tell a computer hey see this right here this is an extreme dip because it's not a number value so what i did is i decided to take the histogram of the macd and turn it into a percentage of whatever market we were trading this way the bot could tell what was considered a big dip so as an example this is kind of what the bot sees so now i can use a number value to tell if a huge spike happened or not compared to the past like these huge spikes upward or downwards here if one of these big spikes happens it'll calculate what the market does and just as a quick hint these results were pretty interesting also as a quick side note i go through all the data and statistics pretty fast so feel free to pause the video if you want to so whenever the macd was in the top five percent of its readings so when it had a big spike upwards compared to the past the s p 500 did this when the macd was in the bottom five percent of its readings meaning it had a big dip downwards the s p 500 did this so what i learned from these results overall extremely high macd readings were more bullish than bearish for the s p 500.

this is because strong momentum is usually followed by more strong momentum meaning extremely low macd histogram readings weren't constantly bullish or bearish here's the results for gold these are the top five percent of the readings these are the bottom five percent of the readings overall from these results there wasn't really a statistical edge for using the macd strategy in gold then if we move to the us dollar index these are the readings for the top five percent and these are the readings for the bottom five percent what i learned from this is that extremes often bring more extremes whenever the histogram went high the dollar kept on climbing whenever the histogram went low the dollar kept falling next we move on to the juicy part the best optimal settings for macd when you first add the macd to the chart usually the default settings are as follows 12 for the fast length 26 for the slow length and 9 for the signal smoothing i decided to put all my knowledge aside and see what the best settings are statistically based off the past history for this part i'm only going to be testing the s p 500 you want to see the results for the best settings for the macd on gold forex crypto or even some of the top stocks like apple and tesla i'll leave all the back test results in my discord plus i usually post some pretty cool tips and tricks in there like my back test results for certain strategies or even sometimes my entries and exits for certain trades so yeah come say what's up i'll leave a link in the description but i'm gonna use two different time frames the daily and the weekly so these results could definitely vary if you're using a different time frame or trading in a different market just keep that in mind and here are my entry and exit rules i will enter a long position when the macd histogram is positive and sell when the macd histogram goes negative i also told the bot to test every number between 2 and 60 to see which numbers are the most optimal which basically means the bot will scrape through tens of thousands of different setting combinations so for example it'll try 2 26 and 9 and then 3 26 and 9 and so on but for every single section let's jump straight into the results the first test was on the daily time frame the optimal macd settings on the daily time frame for the s p 500 were 2 60 and 2. this strategy made a total average profit of 9. 41 per year versus the buy and hold average of 5.

78 per year keep in mind though this is not including dividends being reinvested for the weekly time frame on the s p 500 the best settings were 30 57 and 27. the strategy yielded 6. 12 percent while the buy and hold mean an average of 5.