S&P/TSX 60 MACD Strategy

MACD or Moving Average Convergence Divergence is a momentum indicator that shows the relationship between two exponential moving averages. It consists of MACD line which is 12 EMA minus 26 EMA, Signal line which is 9 EMA of MACD, and histogram showing the difference. It helps identify trend direction and momentum changes.

A buy signal occurs when the MACD line crosses above the Signal line from below called bullish crossover. Stronger signals have histogram turning positive and MACD above zero line. Adding trend filter by only buying when price is above 50 EMA improves reliability.

The histogram shows the distance between MACD and Signal lines. Positive and growing bars mean bullish momentum is accelerating. Positive but shrinking bars mean momentum is slowing. Three shrinking bars often signals upcoming trend change useful for exit timing.

For swing trading use Daily MACD for direction and 4-hour for entries. For intraday use 4-hour for direction and hourly for entries. Daily timeframe provides most reliable signals with less noise. Multi-timeframe approach combining two timeframes works best.

MACD signals fail mainly in ranging markets when price moves sideways causing whipsaws. Using ADX filter above 25 confirms trending market where MACD works best. Also MACD lags price so strong reversals can hit stops before MACD signals exit.

Divergence occurs when price and MACD move in opposite directions. Bullish divergence has price making lower low while MACD makes higher low suggesting potential bottom. Bearish divergence has price making higher high while MACD makes lower high suggesting potential top. Wait for confirmation before trading.

Use higher timeframe like daily for trend direction bias. Only take signals on lower timeframe like 4-hour that align with higher timeframe. If daily MACD is bullish only take bullish 4-hour crossovers. This alignment significantly improves win rate.

Standard 12 26 9 works well for most situations. Faster settings like 8 17 9 give more signals for intraday but more false signals. Slower 19 39 9 gives fewer but more reliable signals. Test any changes on historical data before using. Stick with settings once chosen.

For entries histogram reversal entering on first bar change provides earlier entry than crossover. For exits three consecutive shrinking bars signal momentum weakening and exit before crossover. Histogram often peaks before price peaks giving early warning.

The 50 EMA is most common trend filter. Take bullish MACD signals only when price above 50 EMA and bearish signals when below. Adding ADX above 25 as second filter confirms trending market. Combined filters produce highest quality signals.

Define precise entry rules including MACD crossover plus filters like 50 EMA and ADX. Set exit rules for profit target stop loss and signal exit. Use risk-based position sizing. Backtest on 3 plus years of data targeting above 55 percent win rate and above 1.5 profit factor. Validate on out-of-sample data.

Score using multiple factors. Price at support or resistance plus 2 points. Steep divergence angle plus 2 points. Higher timeframe plus 2 points. Volume confirmation plus 1 point. Multiple divergence points plus 1 point. Scores 7 to 9 are Class A highest probability. Use full position for high scores.

Use long calls for strong bullish MACD signals and long puts for bearish on XIU or SXO. Use spreads for moderate signals. Buy options when IV percentile below 30 for better value. Standard expiry is 3 to 4 weeks. Options provide defined risk and leverage on MACD momentum signals.

Allocate 20 to 30 percent of portfolio to MACD trend following. Within that limit a single index like the S&P/TSX 60 to 40 percent. Account for correlation when multiple equity index positions open. Rotate allocation based on market conditions increasing MACD in trending decreasing in ranging.

Reduce when ADX drops below 20 indicating ranging market. Reduce when experiencing drawdown above 10 percent. Reduce during high volatility events like Bank of Canada or Fed decisions. Reduce when correlation among positions is high. Shift capital to mean reversion or other strategies when MACD conditions unfavorable.