Moving Average Convergence Divergence (MACD) is one of the most famous indicators among the technical community, used extensively by investors who make their trading decisions based purely on technical analysis.
The main idea behind the MACD indicator is that it helps a trader find out the momentum in a trend or, in other words, it is mainly a trend-following indicator. The maths behind this indicator could be a little confusing for investors who are uncomfortable with equations. However, for those who do not mind, it can be described as the relationship between two moving averages price.
Of course, what kind of a moving average one may use would have a lot to do with the final profit or loss. But to keep things simple, all the default settings are calculated by subtracting the 26-day exponential moving average from the 12-day exponential moving average. There is also a signal line, 9-day EMA of the MACD; when the signal line crosses the MACD line from the top, this usually gives a sell signal and when the signal line crosses the MACD line from the below to the upside, it delivers a buy signal.
However, it is important to keep in mind: my suit would not fit every other person. We all have different sizes, so the general settings would not give us the best settings. The winning formula is to customise the technical indicator which works the best. The reason I am talking about MACD here is that out of all the major technical indicators, MACD has produced the best results in the back test. So, it is important to fine-tune this indicator.
For passive investors, the ones who do not have enough time to sit in front of the screen all day long, a daily time frame could be an interesting option for them.
Strategy That Produced Profit of $1.23B
In the below chart, I have customised the settings for the MACD indicator. The MACD settings are as follows: fast line 20, slow line 40 and signal line 4.
I have back tested this on a daily time frame with a portfolio of $100M and used approximately two years’ worth of data. On a $100M portfolio, the net profit to date is $1.23Billion (assuming no brokerage costs, because the trade signal is produced on the next candle – taking care of all the brokerage and slippage costs). In other words, using this strategy over the past two years, would result in a potential profit of $1,023,000,000.
Over this two-year period, we have a total of 33 trades which consist of 17 long and 16 short trades. Total winning trades are 17 and losing trades are 16. The ratio of winning and losing trades shows, that Bitcoin short strategy isn’t the most effective, but it still has added a net profit of $395.16M. Hence, I chose to go short in my strategy. The total profit from the long trades has been $838.54M. The stop loss is a critical part of this strategy and I have used the signal line as a stop loss. Of course, there are far more sophisticated approaches to use stop loss, but in my portfolio, this strategy has produced decent results.
The chart below has three panels. The first panel shows the price of Bitcoin along with signals. Red arrows show sell signal and green arrows show buy signal. The second panel shows the profit/loss line. The third panel contains the MACD indicator, the white line is the MACD line and the red line is the signal line.
To summarise, the key is to find a time frame which suits you the best and then choose a strategy which has worked best on that time frame. Following that, fine tune the strategy further.
Note: the strategy which I have mentioned with the numbers above isn’t the most profitable strategy. This is an average winning strategy in my portfolio test, but there are two others: the maximum winning and the medium winning strategy, both of which have far bigger net profit than this.
Disclosure: I hold bitcoin in my wallet