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TRADING SYSTEMS


NEM In Tune With Reversed MACD System

04/05/10 09:42:21 AM
by Donald W. Pendergast, Jr.

The reversed MACD trading system provides profitable results on most stocks, with its three-year performance record with Newmont Mining of particular interest.

Security:   NEM
Position:   N/A

The reversed moving average convergence/divergence (MACD) trading system comes standard in Compuvision's TradeSim add-on for MetaStock and it's always great fun to run it on a variety of stocks in a realistic portfolio trading simulation to see just how much profit it can generate. Time after time, even with standard MACD settings of 12-26-9, the system has proven to be a durable, time-tested performer that can deliver profits in most market phases (bull, bear, sideways).

But not all equities traders follow all of the component stocks in the NASDAQ 100, much less those populating the Standard & Poor's 500. Some traders like to focus on a handful of stocks, stocks that they take the time to fully analyze on both a fundamental and technical basis. If you're one of those kinds of traders, learning to fine-tune (optimize) the reversed MACD system on your favorite stocks might prove to be a profitable pastime indeed.

Figure 1 is a look at the optimization results of the system over the most recent three-year period in Newmont Mining, one of the most popular of all the gold mining stocks. When traders see how it performs on NEM, perhaps the stock will become even more popular with daily equity traders.

FIGURE 1: NEM, THREE-YEAR EQUITY CURVE. Yes, it does have a nasty drawdown from an equity high, but look at how quickly it made up most of the loss. Regardless, even this incarnation of the reversed MACD trading system produced generally satisfactory results.
Graphic provided by: TradeStation.
 
For those who use TradeStation, the process of optimization can be as simple or as complex as you choose to make it. However, in the case of what TradeStation refers to as the "Pendergast crossover" (the downloadable TradeStation .tsw file that contains all of the basic ingredients to run this strategy — see the Traders' Tips section of the March 2009 STOCKS & COMMODITIES for more details on how to get this strategy on your own TradeStation platform), the process is simple and quick, particularly when using the genetic optimization (125 generations, population size of 50, mutation rate of 0.05, crossover rate of 0.90) option. Out of the top 200 test results (out of 1,250 optimization runs), the strategy shows a range of profitable outcomes, even with substantially different MACD input parameters. In Figure 1, witness the equity curve for the worst of the best 200 runs; it returned nearly $5,000 in backtested profits over the last three years.

Now, shown in Figure 2 are the key TradeStation strategy performance statistics; remember that these are hypothetical backtested results obtained with commissions of a penny per share and slippage of two pennies a share. The strategy issues signals on an "end-of-day" basis, with trade entries and exits occurring at the next session's open.

FIGURE 2: NEM RESULTS. A win rate of nearly 70% looks attractive, but bear in mind that the losing trades are actually bigger than the winning trades. The system uses no stop-loss, which helps explain that one exceptionally bad losing trade. Can you improve on this system by adding a stop-loss exit?
Graphic provided by: TradeStation.
 
The results are outstanding, especially considering that the worst of the best 200 runs produced a net gain of nearly $5,000 with a profit factor of 1.77, obtained with MACD settings (remember, the Pendergast crossover strategy reverses the normal MACD buy and sell triggers, so that you buy on a normal MACD sell signal and sell on a normal MACD buy signal) of 18-32-8. Meanwhile, the absolute best-performing run netted a little more than $7,000 with a profit factor of 2.64 and MACD settings of 17-40-14. The run in the middle of the top 200 runs came through with these stats: $5,279 in net profits with a profit factor of 2.15, obtained with MACD settings of 16-34-15. Bottom line, this system is what designers would refer to as "robust." Traders actually intending to deploy this strategy on NEM would also be well advised to periodically reoptimize the system every three to six months as the underlying market dynamics that drive NEM will inevitably change in some way.

All of the runs used the same starting capital, commission, and slippage factors along with trade allocation/share sizing parameters (shown in Figure 3). The exact MACD settings for this particular optimization run are also shown.

FIGURE 3: NEM RESULTS. No, 18-32-8 isn't the magic MACD formula that will make you a millionaire trading NEM, but this particular TradeStation strategy can be a wonderful start to your adventures in profitable mechanical system trading.
Graphic provided by: TradeStation.
 
System trading isn't all fun and games, but for those who have the emotional and financial fortitude to stay with a logically designed, well-tested mechanical strategy that appears to work in almost any market, using the Pendergast crossover in the TradeStation platform, might be a simple, low-cost way to start trading a real-world mechanical strategy that actually delivers reasonably good profits.



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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