Ultimate Guide to MACD Trading Strategies and Backtesting Results

The MACD indicator can enhance trading strategies, but it should not be relied upon solely for success.

### The Ultimate Guide to MACD: Strategies, Testing, and Optimal Settings
* 📚 After a week of intensive research on the Moving Average Convergence Divergence (MACD), I discovered many insights **beyond my initial knowledge** of this popular trading indicator.
* 🎥 I watched numerous videos and read countless articles to uncover tips and tricks, ultimately **back-testing the MACD on historical market data** to validate its effectiveness.
* 🔍 The MACD, developed by Gerald Appel in the 1970s, consists of four main components: the **MACD line**, **signal line**, **histogram**, and **zero line**, with default settings of **12 and 26 days** for the exponential moving averages.
* 📈 I tested four common MACD strategies, including **buying when the MACD line crosses above the signal line**, using divergence to **predict market momentum**, trading off **extreme MACD readings**, and employing the MACD as a **trend filter**.
* 💡 However, I removed the divergence strategy due to its subjectivity and found that the MACD often **fails to predict market movements accurately**, as upward or downward momentum can continue despite **weakening signals**.
* 📊 My tests revealed that while the MACD crossover strategy performed reasonably well for the S&P 500, the extreme readings strategy indicated that **high momentum often leads to further momentum**.
* 🔧 The optimal settings for the MACD based on back-testing were found to be **2, 60, and 2** for the daily timeframe, and **30, 57, and 27** for the weekly timeframe, yielding **better returns than a simple buy-and-hold strategy**.
* 📉 Ultimately, while the MACD is a valuable tool, it should be used in **conjunction with other indicators and strategies** for successful trading, and I plan to explore **other indicators in future videos**.

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 Appel, 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 buy 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 are 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 it's 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 market 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 two, 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 MACD is 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 subjective and no two traders staring at the same chart will count the same exact divergences. Plus, it's kind of hard to backtest 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 of 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, "What time frame? Great video. What time frame is applicable? What is the time frame? Time frame? How to 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 5.78. These are the best MACD settings you can possibly get with these specific scenarios, at least from past history. That's why I absolutely love backtesting; you can learn so much from past

history, and there's not really any reason to guess for the future. But with that said, the best settings for the past may not even be the best settings for the future; things are always changing, so you do have to keep that in mind. So after doing all this research, I've

learned a lot. Even though MACD is one of the most installed indicators out there, it's not exactly the secret formula you need for massive success in trading. It can be a great indicator and tell you lots of information about a chart, but just like any indicator, it should never

really be used as an exact science. You have to pair it with other indicators, price movements, strategies, research, and do so many other trading techniques that make a successful trader successful. I've been thinking about making this a type of series and doing this style video with all the main indicators. So if you guys

are interested in that, let me know which indicator you would like to see next in the comments. Again, I posted all the other backtest results in my Discord if you want to check those out. Also, if you wanted to learn how to backtest the MACD

I made a full beginner tutorial teaching you all the basics, go check that out. Thanks for watching and I'll see you guys next time. [Music] You

I Tested The MACD - Does It Actually Make Money?

Dedicating my time to giving you the best value possible. My one and only goal is to make you a better trader. Simple as that.

Enjoy!


TradingLab

Extensive research on the MACD indicator was conducted.

Hundreds of videos and articles were reviewed to learn about the MACD.

Backtesting was performed to assess the MACD's effectiveness and optimal settings.

The video aims to provide a comprehensive guide to the MACD.

Explanation of MACD (Moving Average Convergence Divergence), its creator, and purpose.

Description of the four main components of the MACD: MACD line, signal line, histogram, and zero line.

Various MACD strategies were tested to predict market movement.

Four common strategies were selected based on audience input.

Each strategy will be explained and tested on real market data.

Strategy 1: Buy when the MACD line crosses above the signal line (histogram turns green), sell when it crosses below (histogram turns red).

Strategy 2: Identify divergence (price makes higher highs/lows, but MACD doesn't) to predict market reversals.

Strategy 3: Trade based on extreme MACD peaks (high or low) to anticipate momentum shifts.

Strategy 4: Use MACD as a trend filter (higher timeframe MACD histogram indicates trend direction).

Discussion of why the MACD might not always work effectively.

Critique of Strategy 1: Weakening momentum doesn't necessarily signal a trend reversal.

Critique of Strategy 2: Subjectivity in identifying divergences.

Critique of Strategy 3: Extremes can become more extreme; high/low histogram doesn't guarantee reversal.

Strategy 4: Using MACD as a trend filter; comparison with 200 EMA.

Objective evaluation of MACD strategies using statistical data.

Exclusion of divergence strategy due to subjectivity and difficulty in backtesting.

Exclusion of trend filter strategy as it's not a standalone strategy.

Testing remaining strategies (MACD crossover, extreme MACD readings) on S&P 500, gold, and US Dollar Index.

Results of MACD crossover strategy on S&P 500 compared to buy-and-hold.

Results of MACD crossover strategy on Gold and US Dollar Index compared to buy-and-hold.

Results of extreme MACD readings strategy on S&P 500, Gold, and US Dollar Index.

Determining optimal MACD settings through backtesting on the S&P 500.

Backtesting results available on Discord for other markets and assets.

Daily and weekly timeframes used for backtesting optimal settings.

Entry and exit rules: Long when histogram positive, sell when negative.

Testing various setting combinations (2-60 for fast/slow length and signal smoothing).

Optimal settings for daily timeframe: 2, 60, 2; yielded 9.41% average profit per year.

Optimal settings for weekly timeframe: 30, 57, 27; yielded 6.12%.

MACD is a useful indicator but not a guaranteed formula for trading success.

MACD should be used in conjunction with other indicators and trading techniques.

Suggestion for a series of videos on other indicators.

Links to Discord and backtesting tutorial.