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TRADING SYSTEMS


Reversed MACD Trading System Issues New Signals

06/05/09 12:54:25 PM
by Donald W. Pendergast, Jr.

For those comfortable with trading mechanical systems, the reversed MACD system has just issued four new buy signals.

Security:   VPRT, OCR, BGC, EME
Position:   Buy

In the March 2009 issue of Technical Analysis of STOCKS & COMMODITIES, I wrote about the innovative reversed moving average convergence/divergence (MACD) crossover system in an article entitled "Trade System Evaluation." The system is pathetically simple and straightforward -- it simply takes the traditional MACD crossover system and reverses the entry triggers, causing the trader to buy into weakness instead of strength. Exit signals are also reversed, which also forces a trader to sell into strength. Despite some pronounced intratrade drawdowns at times, the system (in historical backtesting) produced winning trades approximately 65-69% of the time (from 1991 to 2008) across a variety of stocks from every conceivable industry group. If you're interested in learning more about the system, please refer to the article; you may be able to adapt certain aspects of the system to your own requirements and, in the process, may be able to come up with something even better. Regardless, next up are the stocks issuing buy signals as of June 3, 2009.

FIGURE 1: REVERSED MACD CROSSOVER BUY SIGNALS. All are from different industry groups. Entries are taken at the next trading session's open.
Graphic provided by: MetaStock.
 
The reversed MACD crossover system issued buy signals for the following five stocks: ACM, BGC, EME, OCR, and VPRT (Figure 1). Each stock hails from a different industry group (engineering R&D services, heavy construction, wire/cable, medical/drugs, and commercial printing), and each one also has at least 400,000 shares of average daily volume for the past 50 trading sessions. All stocks are well above the "don't touch it if it's less than $5/share" price level, for obvious reasons; many mutual funds shy away from sub-$5/share stocks, and in most cases so should you, unless there is a compelling long-term investment case to be made for the shares in question. Since all we're interested in here is a quick "buy on weakness, sell on strength," we won't mess with cheap, low-volume stocks at all.

FIGURE 1: OCR, DAILY. The reversed MACD crossover entry (blue) and exit (red) triggers are at the bottom of the chart. Trade entries are highlighted by the green and red arrows/circles that show the opening price entry and exit areas.
Graphic provided by: MetaStock.
 
Figure 2 is a daily chart for one of these stocks, Omnicare Inc.(OCR). The last two trades made with this particular system were profitable, but for hard-core system traders who truly believe in this method, it doesn't matter if the last two trades were winners or losers, because they have learned to completely trust the signal output of their well-developed, extensively backtested trading systems. Sure, it's tempting to want to overlay a trendline, moving average, relative strength index (RSI), or Bollinger bands to the chart, too, attempting to locate additional technical confirmation for the trading signal, but as soon as you start wavering and letting external technical and fundamental factors (that is, those that aren't a part of your well-researched and exhaustively back- and/or forward-tested trading system) influence your decision-making process, you are likely doomed to failure as a competent, profitable system trader. Sure, it's great to know that OCR's daily chart features a series of higher lows, but then again, what about that lower high? Are you going to let that external (as per the previous definition) bit of chart data prevent you from taking a buy signal like this one, even if you know that this system will typically win 67% of the time on this particular stock?

What I said about OCR's entry signal setup also applies to those of the other four stocks. None of the setups are perfect, and you can probably find many reasons why each buy signal can and should be ignored. But that's not the way to successfully trade a proven mechanical system, now is it?


Systems trading isn't for everybody, but then again, neither is discretionary or hybrid (part mechanical/part discretionary) trading, either. Truth be told, most people shouldn't be trading at all (but that's another story). But if you can carefully construct, properly test, and then mercilessly implement a well-designed, battle-hardened mechanical trading system, you'll probably agree that this style of trading is a lot easier on the psyche than most forms of discretionary trading. Even better, compared to the fatally flawed "buy, hold, and hope" strategy, trading a good mechanical system really is the only way to go.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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Date: 06/09/09Rank: 1Comment: 
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