Crude Oil MACD strategy is intended to capture longer-term trends in the crude oil market by using MACD indicator with ADX indicator acting as an additional filter.
Crude Oil market is characterised by a high intra-day volatility, but at the same time it is often trending for the extended periods. This strategy aims to take advantage of these trends, while at the same time limit the downside risks.
This is a medium term strategy, which should on average, generate 1 trade per day.
MACD (moving average convergence/divergence) is a momentum indicator.
The main line is the difference between the “fast” and “slow” exponential (i.e. more weight is given to the more recent data points) moving averages (default settings 12 and 26 bars, respectively). The signal line is the 9-bar exponential moving average of the main line.
If the main MACD line is above zero, it can be interpreted as the increasing upside momentum. Conversely, MACD line below zero means increasing downwards momentum.
The crossovers of the main line and the signal line can be treated as the trigger for a buy signal (if the main line crosses the signal line from below), or the sell signal (if the main line crosses the signal line from above).
ADX (average directional index) is an indicator measuring the strength of the trend, with no regard to the direction of the trend, using the moving average of the price range expansion over the given number of bars (default setting is 14 bars). Rising ADX line signifies a trend gaining strength, whereas the falling value of ADX means that the trend is getting weaker, or is absent.
As a result, this strategy will be characterised by a relatively low ratio of winning to losing trades (approximately 1:10) and a high number of consecutive losses, but the winning trades should be significantly larger the losing trades.
Buy / Sell signals are generated if all of these 3 conditions are met:
- Main MACD line crosses the signal line from below / from above
- Main MACD line is above / below zero
- ADX line is increasing (current bar’s value is higher than the value two bars ago)
Using ADX in addition to MACD acts as a filter to limit the number of false signals.
In the interest of protecting the down-side risk, the stop-loss is set by default to 13 pips. In addition to that, the strategy includes the trailing stop set with the default settings of 220 pips, which is intended to protect the unrealised p/l.
There is no target take-profit set, so that the longer-term trends can be taken advantage of.
The positions can be closed in one of these three situations:
- Stop-loss is hit
- Trailing stop-loss is hit
- Opposite direction signal is generated – in such case, the position will be reversed
This strategy performs best in a market with the strong trends and is likely to deliver poor results during the prolonged period with no apparent trend in either direction.