17 Jun 2021
When used, the MACD gives signals where we see positive crossovers and negative crossovers. Many traders and trading bots look to trade these signals, placing a long when there is a positive cross and a short when a negative cross occurs.
In this article, we will be looking at an advanced MACD trading method. If you are unaware of the MACD, we recommend that you watch our MACDvideo to introduce you to the indicator.
Firstly, we are going to start this article by looking at a common misconception with the MACD. When used, the MACD gives signals where we see positive crossovers and negative crossovers. Many traders and trading bots look to trade these signals, placing a long when there is a positive cross and a short when a negative cross occurs.
The misconception surrounds when a trade should be placed and the positioning of the slow/fast lines. For example below the slow and fast lines are both at the lowest levels seen in over a month. The fast and slow lines have just seen a positive crossover, therefore the misconception is that it is highly likely BTC will see a major move towards the upside.
The bullish price action expected did not occur. Instead BTC saw a 9% loss over two days.
BTC/USDT MACD failure
Why did this occur? Surely, a positive MACD cross in a highly negative area BTC/USD points to a major rebound? Or is it because the MACD is an ineffective indicator for the BTC/USD pair?
The reason why this occured is because of MACD trend weighting. MACD trend weighting is when trades are placed on one side, long or short depending on sentiment. Trend weighting varies regularly with cryptocurrencies as the market evolves. There is no set strategy to using MACD weighting. However, it can still be taught.
MACD example of no trend weighting - standard MACD usage
MACD trend weighting cannot be identified by standard MACD trading bots. These standard bots simply look for crossovers with the slow and fast MACD line.
Below is an example of the expected trade placement from a typical MACD bot or MACD crossover trader, not utilising MACD trend weighting.
This example also shows that a bot is only as good as the trader using it. Trading bots need to be maintained and used according to the market scenario.
- L = long placed
- S = short placed
- White hitmarker = crossover
BTC/USD - MACD crossover trading
As we can see from the chart above, there are lots of trades over a short period of time. There are eight trades over a period of five days, averaging one trade every 15 hours. During this period BTC was highly volatile. Bots and crossover traders typically see good returns during periods of high volatility, however as shown below the bot or trader would have seen a poor return of 7.06% from eight trades.
BTC/USD MACD trading returns
Additionally this return excludes trading fees, psychological trading effects and hourly indicator variations.
BTC/USD MACD USD return from $100USD
The same example with a trader using MACD weighting
During this period it was clear that BTC was about to see downwards movement. BTC was seeing continuous negative breakouts from ascending wedges (corrective - negative price continuation patterns) and was failing to break above the key purple zone. BTC failed to create higher highs and the middle of the month drop seen in Jan, Feb, March and April was close. The indications of major negative price action were there.
BTC/USD 26/04/21 - 12/05/21
Therefore, if the MACD was being used as a long / short indicator, then MACD weighting needed to be used.
In this example the outlook was bearish, therefore MACD weighting suggests that only shorts are placed. Positive MACD crossovers are used to end the short.
Bearish outlook - MACD weighting
On the contrary, if the outlook is bullish the reverse approach is taken, as shown below.
Bullish outlook - MACD weighting
Example - MACD bearish weighting example
As explained earlier, the period which was being evaluated during the standard MACD stage was bearish. Therefore we will be using the negative MACD weighting system, only placing shorts.
Shorts are placed at a negative crossover, shorts then excited at positive crossovers. In the chart below we can see the trades placed.
BTC/USD - trades placed using MACD with correct weighting
In the chart above we can see that the amount of trades placed is still high, six trades being placed over seven days. However the likelihood of success is increased with the correct weighting, four out of six trades seeing a positive PNL.
Zero trades saw a loss of more than 5%. In the chart below, we can see how during this period there was an overall profitability of +28.26%.
BTC/USD - MACD weighting
MACD weighting conclusion
MACD weighting can make or break a MACD strategy.
It is vital that the correct weighting is implemented. However, if thorough analysis takes place before MACD weight is chosen, this should decrease the likelihood of choosing the incorrect weighting. When deciding on which weighting is used, other analysis techniques typically used by the trader should be taken into account.
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