I took more than 100 trades with the MACD indicator and found something really interesting.
But why did I take so many trades?
In a recent video where I analyzed 1000 trades, we saw how the candlestick patterns used to get around a 75% win rate in the old days on the stock market index.
But then the win rate started to go down and down.
Now, in the modern age, the win rate of candlestick patterns is much lower than before.
This led me to an important question.
Have the classic indicators, such as the MACD or RSI, started to suck in the modern age as well?
I mean, do the popular indicators that we put our hard-earned money on actually work in the modern age, like they did in the ancient days when they were created?
So to find the truth, I took a lot of trades with the MACD indicator before the year 2000 and after the year 2000.
I ran this test on the S&P 500 stock market index and on the one-day time frame.
First, I added the MACD indicator to the chart.
Then I added the 200-period exponential moving average.
Since I am going to use the MACD to take trades in the direction of the trend, this 200-period moving average will help me identify the trend direction.
For example, on this chart, the blue line in the MACD indicator is the MACD line.
And the orange line is the signal line.
When the MACD line crosses above the signal line, and this crossover happens below the MACD zero line, I took a long buy entry only if the price was also above the 200-period moving average trend.
I set the stop loss below the end of the pullback.
And I set the profit target 1.5 times the stop loss distance.
In other words, I used a 1.5 to 1 reward-risk ratio.
Why this ratio specifically?
Because it is the best for trend strategies, according to the data we found in one of the previous testing videos on the official Trading Rush channel.
This is how I took the long trades.
In a short setup, when the MACD line crosses below the signal line.
And that crossover happens above the MACD zero line.
I took a short trade at the closing price of the candle and set the stop loss above the end of the pullback, and the profit target 1.5 times the stop loss distance.
When I started the test from 1962, the results were excellent.
This MACD indicator kept an incredibly high win rate above 60% in the early stages of testing.
In other words, in the really old market, the MACD indicator was working exceptionally well.
As you can see in the official Trading Rush backtester app, the profit graph was consistently going in the upward direction.
When I finished taking the first 100 trades, the year was in the late 1990s.
And this MACD strategy produced a solid 55% win rate.
The breakeven win rate with a 1.5 to 1 reward-risk ratio is 40%.
So this 55% win rate is 15 points above the break-even percentage.
So this win rate is an incredibly high win rate.
Definitely profitable.
But even though the MACD strategy was working before the year 2000, what about after 2000?
Does the MACD strategy still perform just as well?
Or is the win rate going lower and lower just like the candlestick pattern?
So I tested more after around the year 2000, and this happened.
The profit graph first went up a little bit, then went down even more, and then went up again a little bit, and then went down a little bit.
Basically, the profit graph was pretty much flat for the most part.
And it only started to go up consistently near the end of the testing.
In total, I found 83 trades after around the year 2000.
And the win rate MACD got was only around 44%.
I mean, the break-even win rate is 40%.
So this 44% win rate is still profitable in the long run.
But the performance of the MACD indicator is much worse in the modern market than it was in the old stock market.
This data is just like the candlestick testing data we saw in a recent video.
Both MACD and candlestick patterns used to work really well in the old days when they were created or were popularized by books.
But nowadays, they kind of suck on the stock market one-day time frame.
But why did this happen?
Well, it’s because the markets have changed.
The markets have become more efficient, and trading algorithms are taking over.
But this data is just for the stock market one-day time frame, especially for the S&P 500 index.
MACD is still one of the best indicators for identifying the end of the pullback in a trending market.
Even in the modern age, when I tested it in the trending market on different stocks, forex pairs, crypto, and on different time frames, it got around a 60% win rate.
The win rate drops to around breakeven when the price is not trending.
But when the price is in a good trend, the data says MACD has one of the highest accuracies out of all the indicators.
So, I still use it to identify things in my own trading journey.
Thanks for watching.