Another System That Fascinates Me: 50/100 SMA, MACD

[Daddybyday]

Hello, All!

I've been on a lot today, journaling and bouncing ideas of y'all as I think about beginning to do more active trading in my retirement accounts. You can check out the scope of my project here: https://www.trade2win.com/threads/s...erm-etf-trading-strategy.234833/#post-3092379.

Here is another system that I've found in my wanderings that fascinates me. It is a pretty simple system based on the 50 and 100 SMA, and the MACD. You can read about it from the source here: https://www.investopedia.com/articles/forex/08/macd-combo.asp.

Here are the rules for a long trade, adjusted from a forex bias:

1) Wait for the currency to trade above both the 50 SMA and 100 SMA.
2) Once the price has broken above the closest SMA, enter long if MACD has crossed to positive within the last five bars, otherwise wait for the next MACD signal.
3) Set the initial stop at a five-bar low from the entry.
4) Exit half of the position at two times risk; move the stop to breakeven.
5) Exit the second half when the price breaks below the 50 SMA.

What I like about this:

1) I like the mechanical nature of it--entry and stops are clear, and it is pretty much a "set and forget" strategy.
2) I like that it looks like, on a daily chart, it will coincide well with the time frame that I'm looking to trade.
3) I like the dual aspect. In looking at chart strategies, there are 2 frustrations I find. One is that a strategy seems to pull you out too soon, leaving money on the table. The other is that it leaves you in too long, subjecting you to whipsaws, or giving back too much of your gains. I like the idea of locking in part of the profit by selling half of the position early, and letting the rest run.

What makes me nervous:

1) Again, the rigidity, does it really work?
2) This seems like it would be good for trending markets, but what about false breakouts during range-bound markets. How do I protect myself from that?

I'm going to pull up a chart from my universe, apply the indicators, and see what a past trade based on this strategy would look like, in the reply below.

As always, I'd truly appreciate your feedback, and experiences in using systems like this.

Thanks!

Tom

 

[Daddybyday]

OK, as promised, here is a sample trade based on this strategy. IMPORTANT: I did not "cherry pick" this chart for IVV--I simply followed the position back until I had a full round-trip trade. If it had been a losing trade, I would have posted that. I'll post the chart, a description of the trade, and then some comments or thoughts.

Here are the steps taken in this trade:

1) IVV Breaks above the 50 SMA on 6/30, but there is no MACD signal.
2) On 7/2, IVV breaks back above the 50 SMA.
3) On 7/10, the positive SMA crossover occurs, triggering a buy signal.
4) On 7/11, 4 shares of IVV purchased at 279.07 (I'm just using that number of shares for the math, it could be any even number). (Cost of trade: 1116.28)
5) The initial stop loss is placed at the low of the previous 5 bars (July 2) at 272.29. As you can see, this stop is never hit during the trade.
6) Initial target set at 292.63.
7) Initial target hit, 2 shares sell at 292.63 (Trade Balance: -531.02)
8) IVV Crosses under SMA 50 on 10/7, remaining 2 shares sell at 289.70, closing the trade out. Total profit for trade: 48.38. Percentage gain: 4.3% 0ver 3 months. This is an annualized gain of 17.2%

Some Thoughts

1) I didn't get rich, but there was not a bad profit on the trade.
2) Looking forward on the chart, that drop below the SMA 50 came a the beginning of a large downtrend that I missed, and I was out of the market through it. It now seems to be setting up for another possible trade. I'm pretty happy with these results.
3) In this case I would have done better by just selling all 4 shares at the 2 x risk target, versus letting the trade run.
4) I would also have done better in this case by simply trailing the stops under subsequent swing low points.

5) Given 3 and 4, it may be worthy keeping the entry, but considering an alternate exit strategy.

That said, I'm really happy with how this one turned out. I'm looking forward to paper-trading this strategy a bit.

I'll look forward to your thoughts!

Tom

 

[malaguti]

Hello, All!

I've been on a lot today, journaling and bouncing ideas of y'all as I think about beginning to do more active trading in my retirement accounts. You can check out the scope of my project here: https://www.trade2win.com/threads/s...erm-etf-trading-strategy.234833/#post-3092379.

Here is another system that I've found in my wanderings that fascinates me. It is a pretty simple system based on the 50 and 100 SMA, and the MACD. You can read about it from the source here: https://www.investopedia.com/articles/forex/08/macd-combo.asp.

Here are the rules for a long trade, adjusted from a forex bias:

1) Wait for the currency to trade above both the 50 SMA and 100 SMA.
2) Once the price has broken above the closest SMA, enter long if MACD has crossed to positive within the last five bars, otherwise wait for the next MACD signal.
3) Set the initial stop at a five-bar low from the entry.
4) Exit half of the position at two times risk; move the stop to breakeven.
5) Exit the second half when the price breaks below the 50 SMA.

What I like about this:

1) I like the mechanical nature of it--entry and stops are clear, and it is pretty much a "set and forget" strategy.
2) I like that it looks like, on a daily chart, it will coincide well with the time frame that I'm looking to trade.
3) I like the dual aspect. In looking at chart strategies, there are 2 frustrations I find. One is that a strategy seems to pull you out too soon, leaving money on the table. The other is that it leaves you in too long, subjecting you to whipsaws, or giving back too much of your gains. I like the idea of locking in part of the profit by selling half of the position early, and letting the rest run.

What makes me nervous:

1) Again, the rigidity, does it really work?
2) This seems like it would be good for trending markets, but what about false breakouts during range-bound markets. How do I protect myself from that?

I'm going to pull up a chart from my universe, apply the indicators, and see what a past trade based on this strategy would look like, in the reply below.

As always, I'd truly appreciate your feedback, and experiences in using systems like this.

Thanks!

Tom

Hi Tom, my reservation for a system like this, is the use of price crossing above/below an SMA for an entry/exit. on this one fortuitous occasion it worked, however price could have gone up and back down through the SMA many times whilst the MACD was positive and the 50>100. you would likely end up paying a lot of commission to your broker
don't let me put you off of course, however i would just strongly recommend you backtest this...im not sure how long it might take you manually
I just backtested this automatically and in the last 4 years 31 trades took place on IVV, and only 25% ended up profitable...
not that i want to put you off, however backtesting a theory could save you hours if you could do it quickly and automatically

 

[Daddybyday]

Hello, Malaguti,

Fascinating! How did you back test this? I'm a certifiable noob, so I've been doing some rethinking on this one as it is--I'll post more about it when I have more time (heading to Church with the Fam in about 3 min). Can you share more about how you did the backtest, what software did you use?

Thanks!

Tom

 

[malaguti]

there are 3 that i might use
amibroker, omnitrader and quantshare. they each have their various strengths.
i backtest a scenario to see if it has legs, then if there is a positive expectancy i'll spend more time putting a "strategy" around it. some strategies are of course much easier than others. in your case it was relatively straight forward as they are common indicators with straight forward buy/sell rules.
not that they have to be complicated of course!
let me know if you have other ideas, i'll help if i can

 

[Daddybyday]

Malaguti,

Thank you. I've been thinking over night, and I think I'm going to do a bit of an overhaul. In short, part of me thinks that I need to do more learning about price action versus looking at indicator based strategies. I've also been brooding about scaling in versus taking a whole position up front. I'll post about that later.

How much are the back-testing packages you are using--I think that may be a definite wise investment if I decide to move forward with this!

Thanks!

Tom

 

[malaguti]

Omnitrader costs about$50/month. and thats just the basic package. in order to code your own indicators etc you need the "professional" edition which goes up to $150..really don't bother! for what you get I'm a tad disappointed however it has enabled me to code indicators which do mimic price action and the way it uses blocks for a strategy it makes it quite unique
I use this for anything quite complicated. its incredibly slow though which is frustrating!

Amibroker is free, it uses yahoo data, but with just a handful of ETFs its great. Its also by far the fastest in its calculation. the downside is its not easy for beginners. however i'm sure i can help get you started, and then with a template you can begin to "code" your own. i still haven't got to its full potential which is asset allocation and rotational strategies

quantshare, is about $250 one off price and what you get for the money such as neural networks and genetic algorithms is fantastic. it comes with very little instructions but i was able to do your backtests in that in no time at all and you can code your own indicators or download others. again, can be quite daunting but like i say for what you are trying to do, and with anything i have already you should be able to start

as its free, my pick would be amibroker. start from there and if you were to take it more seriously its a great tool to learn. you just need a good strategy to get going, and this is where stan weinstein could really help and amibroker to play with a few ideas

feel free to message me, and i can share anything i have

 

[Daddybyday]

I ordered Weinstein's book yesterday, and expect it to show up tomorrow ;-).

I'm really looking forward to it, because it seems to be what I'm looking for--something between the short-term trading that I find a lot of when I look for articles, and buy and hold no matter what (which is what most of my portfolio consists of). I came into this looking for a more mid-term position trading strategy, and from what I've read about Weinstein, I think I'll learn some valuable stuff. Looking into Amibroker now.

Thanks!

Tom