the macd indicator, i'm just gonna reveal to you the approximate win rate of the indicator so you don't have to waste your precious time and money testing it yourself let me do all that for you so first there are two methods that i'm gonna be testing with the macd indicator so the first method is i'm gonna call it the normal method which is just your normal way of using the macd the second is i'm gonna call it the new method this method still uses the macd indicator but in a very different way some say that this second method actually gives a higher win rate let's see so let me give a quick explanation just in case some of you don't know how the macd works there are four components in the macd this blue line is called the macd line this line moves faster and is more sensitive to price action which will be the main focus of the macd indicator this orange line is called the signal line
this line reacts slower to price changes and is used to show
the direction of a trend less sensitive it is mainly used to filter out market
noises next we have the histogram it simply represents the difference between
the signal line and the macd line you can see that if the two lines are further
apart the histogram gets longer and if the two lines are closer the histogram
gets shorter next we have the baseline which just shows the middle area of the
mat the indicator when the two lines are above the baseline it indicates a
bullish sentiment meaning that the market is uptrending and when it is below the
baseline it indicates a bearish momentum or a downtrend so now that you know
the parts of the macd
i'm gonna explain to you how you use the macd. there are two
methods that i'm gonna back test so the first method is called the normal
method this is simply how most people use the macd indicator so quick summary
there are two lines it can be either above or below the baseline if the two
lines are below the baseline and the macd line crosses above the signal line
you go long and if the two lines are above the baseline and it crosses below
the signal line you go short pretty simple now for the new method this is a
different way of utilizing the macd the lines can be either above or below the
baseline if the lines are below the baseline you wait for it to cross downwards
again then you take a short position so after the lines crosses upwards wait
for it to cross downwards again while still being below the baseline that's
when you take your short position it's the same example with
the long position when the lines are above the baseline and it crosses upwards
again while still being above the baseline you take a long position for the
normal method it focuses on spotting reversals as the lines are below the
baseline when you go long however the new method focuses on trend continuations
as you enter a long position when the lines are already above the baseline for
my exit strategy since we are solely testing the macd indicator that means i
will also use the macd indicator as my exit strategy my exit strategy would be
the same for those two methods every time the macd line and the signal line
crosses over i exit my trade it doesn't matter if it's above or below the
baseline if it crosses over at any point i close the trade
there are a couple of rules that i use when back testing an
indicator the first rule is measuring at a candle's close what do i mean by
this well indicators collects data from the candle itself so if the candle is
still moving the indicator would also be moving that is why it is important to
start measuring from a candle's close for example here we have a chart let's
say i'm testing the normal method so i'll start measuring here because it's a
green candle so the close is in the top part of the body so i'll start here and
let's say just an example that our exit signal is here and it happens to be a
red candle a red candle closes at the bottom of the candle's body so the
measurement would be from this point to this point the next rule is that if my
entry signal appears immediately after my exit signal i'm going to enter at the
next candle so
what do i mean by this because our exit strategy is waiting
for the macd to cross over there are often times where the macd displays an
entry signal right after it displays an exit signal as shown here so if this
happens i'll start measuring at the next candle's close i'm going to be using
the eurusd 15 minute chart for this back test so here's an excel sheet that i
created to record this back test here i can insert how much wins and loss i
already got and it would automatically calculate the win rate so i'll consider
a win if i make a profit it does not matter how much pips i got if i got a
profit i'll consider it a win however if i get a loss or a break even i'm
counting it as a loss this back test i'm going to start with a capital of ten
thousand dollars and every trade i'm using 150 times leverage but i'm only
trading with one percent of my capital per trade so
that i would not blow up my account this means that i would
only risk one percent of my capital per trade this excel sheet also
automatically counts your new capital after you trade so for example let's say
i got three pips from a trade so i'll enter it here and it'll automatically
calculate how much profit you got what's your new capital and what is your new
trading budget because like i said i'll only risk one percent of my capital per
trade so this automatically calculates one percent from my new capital bear in
mind that these results are just an approximate win rate because you can't
determine the exact win rate of the strategy by only testing it 100 times thank
you so after back testing these two types of macd indicators 100 times here are
the results so for the normal method we have a 42 win rate with 42 wins and 58
losses but even though the win rate is less than 50
we still managed to come out profitable we made a total of
ten dollars and thirteen cents or nine pips from our ten thousand dollars
investment now remember that we didn't manage our losses and had a proper exit
strategy so if we had used a proper risk management and a good exit strategy
i'm pretty sure we would come out more profitable we actually made 343 dollars
at some point our biggest single trade win was 115 dollars and 42 cents which
was about 57 pips however our biggest one trade loss was 156 or 77 pips like i
said had i used the correct exit plan and a proper risk management i could have
avoided that huge loss and exited that trade earlier for the new macd method
the second macd strategy had a whopping 23 win rate which is very far compared
to the normal method with 42 we lost a total of 93.70
which is about 46 pips using this indicator at some point we
reached a profit of 138 and 33 cents our biggest one trade profit was 59 and
our biggest one trade loss was only 42 dollars unlike the normal method where
most losses comes from huge one trade losses this indicator's losses mostly
comes from small yet continuous losses so i think even though if we use the
tight stop loss and the correct money management the results wouldn't be any
better either because the odds are simply against us the concept of the new
method kinda makes sense as it tries to capture continuation trends instead of
reversals yet the normal method does a much better job of detecting
continuation trends while giving a good entry because in my opinion the new
method tries so hard to capture continuation trends meaning
that the trend had already happened it also displays a late
signal and it's not even a good entry overall i think the macd does a really
good job of spotting early trends of course trends on the market does not
always happen sometimes the market is stagnant but the macd rarely gives false
signals for entry especially when you combine it with a good exit indicator if
you want me to backtest multiple indicators comment which indicators you want
me to backtest below and remember the most important factor to determine your
success is always money management because trading is just a probability game
and finding which indicators has the highest probability would give you an edge
and if you pair that up with good money management you will succeed.