Improving MACD Technical Analysis by Optimizing Parameters and Modifying Trading Rules: Evidence from the Japanese Nikkei 225 Futures Market

Byung-Kook Kang

doi:10.3390/jrfm14010037

Abstract

Much research has examined performance or market efficiency by using the moving average convergence divergence (MACD) technical analysis tool. However, most tests fail to verify efficiency with the traditional parameter settings of 12, 26, and 9 days. This study confirms that applying the traditional model to Japan’s Nikkei 225 futures prices produces negative performance over the period of 2011–2019. Yet, it also finds that the MACD tool can earn significant positive returns when it uses optimized parameter values. This suggests that the Japanese market is not weak-form efficient in the sense that futures prices do not reflect all public information. Hence, the three parameters values of the MACD tool should be optimized for each market and this should take precedence over finding other strategies to reduce false trade signals. This study also tests which models are able to improve profitability by applying additional criteria to avoid false trade signals. From simulations using 19,456 different MACD models, we find that the number of models with improved performance resulting from these strategies is far greater for models with optimized parameter values than for models with non-optimized values. This approach has not been discussed in the existing literature.

Highlights

moving average convergence divergence (MACD) (Moving Average Convergence Divergence) is one of the most popular momentum indicators used in the technical analysis of the prices of stocks and other tradeable assets
It finds that the MACD tool can earn significant positive returns when it uses optimized parameter values
The three parameters values of the MACD tool should be optimized for each market and this should take precedence over finding other strategies to reduce false trade signals

Summary

Introduction

MACD (Moving Average Convergence Divergence) is one of the most popular momentum indicators used in the technical analysis of the prices of stocks and other tradeable assets. It consists of three parameters to define three time-periods: two parameters are for the calculation of the MACD series which is the difference between the ‘short-term’. In terms of signal generation, it is common to interpret it as follows: ‘buy’ when the MACD line crosses up through the Signal line and ‘sell’ when it crosses down though the Signal line. This trading rule is called a “signal line crossover” and the buy/sell signal is considered to be a primary cue provided by the indicator, the actual ways investors use the MACD model to trade are diverse. It is said that Appel originally suggested two different settings on a daily chart:

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