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Technical analysis of Forex by MACD Indicator

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 International Journal of Humanities and Management Sciences (IJHMS) Volume 1, Issue 2 (2013) ISSN 2320–4044 (Online)

Technical analysis of Forex by MACD Indicator

Seyed Hadi Mir Yazdi and Ziba Habibi Lashkari

factors in forex transactions which would provide a basis to

Abstract—In these days, trading automation is one of the determine that country’s currency’s value are economic
major topics in the field of financial research. Buy and sell are indicators of a country and predictions of future economic
the key rule to an automated trading system which is possible performance. Accent to arrive at a fair value of currency
to generate by various technical indicators in Forex. Benefits between that country and other countries is put on interest rate
and disadvantages of each indicators, has its own. Regarding differentials, the agent who trade by using fundamental
to our first research result which was based on P-sar indicator analysis is fundamentalist[5].
and published in the IIAFC conference[1]. In this paper, we
will focus on the MACD indicator for four currencies namely B. Technical Analysis in Forex
EURUSD, GBPUSD, USDCHF and USDJPY individually to Technical analysis (TA) or charting that usually include
identify effectiveness of the indicator regarding to the amount price and volumes by utilizing historical data created by
of profit generated, using hourly data of market stretch from market reaches at future currency price movements[6]. TA has
January 2001 to December 2010. Virtual Historical Trading received little attention by academicians, though, it has been
Software (VHTS) is developed for the purpose of computing applied for more than hundred years [7-9].Quantitative and
the indicator based on its original formulas and interpretations; qualitative are two main analytical concepts for TA. The
for applying the assumptions; for trading based on buy and sell quantitative- based analysis tries to make indicators such as
signals generated by the MACD indicator. MACD and P-SAR while the qualitative-based analysis
depends on clarification of the shape of geometric patterns like
Keywords— Forex, MACD, Technical analysis, Fundamental
Analysis, Indicator.
levels of support and resistance and double bottoms[8].
Successful TA is constructed on three basic principles [2]:
I. INTRODUCTION C. Profitability

U SING currencies in trading commenced in 1973 after

breaking down the Bretton Woods agreement based on
which the value of currency was underpinned by the gold
Several studies support TA and revealed that TA offers
significant financial signals [9]. In addition, the subsequent
researchers concur with this actuality; Sweeney (1986, 1988);
owned by the central bank. Forex is a free market that defines Brock, Lakonishok, and LeBaron (1992); Blume, Easley, and
the prices of currencies based on the supply and demand of a O’Hara (1994) ; Neely, Weller, and Dittmar (1997); Chan,
particular currency [2]. Jegadeesh, and Lakonishok (1996, 1999); Gencay (1996,
Compared to other financial markets, the Forex market has 1998, 1999); Brown, Goetzmann, and Kumar (1998);
following benefits: 24-hour operation 5 days a week, an over- Rouwenhorst (1998); Neely and Weller (1999); Chang and
the-counter market, and no fixed location. Moreover, Forex Osler (1999); Lo, Mamaysky, and Wang (2000); Chan,
market produces daily volume of USD 3.2 trillion that makes it Hameed, and Tong (2000); and Hsu and Kuan (2004) [10-19].
as the biggest financial market [3]. Since, there is no limitation Their findings imply the popularity of TA over FA is due to
by the central bank for issuing the currencies, any currency can the fact that the former can “beat the market”.
be traded [4]. According to Ding et al. (2010), quick Moreover, (Papadamou and Tsopoglou, 2001) indicated that
technological changes have increased the effectiveness of TA approach can generate higher profit against a simple “buy
Forex transactions and allowed the market to grow faster by and hold” strategy which is a fundamental analysis [20]. In
overcoming geographical restrictions as well as decreasing the during on 8 years from 1989 until 1996 for finding out whether
costs of entry and transactions. TA is profitable, they tried to evaluate USDDEM and
A. Fundamental Analysis in Forex Trading USDGBP in their study. In addition, Lui (1998) stated that
more than 85% of Forex traders in Hong Kong used both
The best way for determining asset valuation based on key
technical and fundamental analysis to predict future price
underlying factors is fundamental analysis (FA). Significant
movements; however, they believed that TA is more helpful
than FA in forecasting the trends [21].
Seyed Hadi Mir Yazdi is Faculty of Business and Accountancy
(FBA),University of Malaya (UM) Kuala Lumpur, Malaysia
[email protected]
II. INDICATORS
Ziba Habibi Lashkari is with International Business School (IBS), The mathematical calculations based on currencies
University Technology Malaysia (UTM) Kuala Lumpur, Malaysia
information such as volume and prices (opening, low, high and
[email protected].

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closing) with a specific formula called indicators. TO the underlying security. Moreover, using Exponential Moving
forecasting future price changes can use from the value of Averages (EMAs), opposite to Simple Moving Averages
result. They are used to offer more information about market (SMAs) can remove some lags.
to be applied by the investors in decision making. Indicators MACD as a momentum indicator can predict the moves in the
based on their functions are sorted to four groups; trend underlying security. MACD divergences are basic elements in
indicators, volume (strength) indicators, volatility indicators forecasting a trend alters. A Negative Divergence signal which
and momentum indicators as follow [6]. bullish momentum is waning and a change in trend from
bullish to bearish is possible, too. It warns the traders to take
A. Trend Indicators benefits in long positions or for violent traders setting off a
Explain continue to move in one direction in the exchange short position.
rate over time, called a trend. Trends have three directions; Another advantage of MACD is its application in daily,
sideways, down and up. Trend indicators level variable rate weekly or monthly charts. In this regard, the divergence and
data to produce a mix of market direction. There are some convergence of two moving averages will be shown by the
Trend Indicators for example Moving Averages (MA), MACD. Although, the standard setting defined for the MACD
MACD, P-SAR and Trend lines. is the difference between the 12 and 26-period EMA, any
combination of moving averages can be applied. In addition,
III. MACD the set of moving averages to be applied in MACD can be
changed for each individual security. For example, a faster set
The MACD (Moving Average Convergence/Divergence) is
in category of trend indicators which shows relationship of moving averages may be suitable for weekly charts. On the
between prices and moving averages. The MACD was other hand, slower moving averages may appropriate to help
introduced by Gerald Appel, in 1970s. It is the different smooth the data for volatile stocks. Regarding this flexibility,
between exponential moving averages for 26 and 12 days. the MACD can be adjusted to the trading style, risk tolerance
There is a plot of another exponential average for 9 days and objectives of the traders.
which is placed on top of the MACD to indicate long/short
opportunities; it is called “trigger” or “signal” [22]. IV. SCOPE OF THE STUDY
The MACD is very simple to calculate; the difference In this study real data of trading on hourly basis and for 10
between exponential moving averages for 26 and 12 days. years from January 2001 to December 2010 is used. This set
There is a plot of another exponential average for 9 days of data with numerous transactions will produce more reliable
which is placed on top of the MACD to indicate long/short results. The present study is aimed to assess the major
opportunities; it is called “trigger” or “signal” (Appel, 2008).
indicator to forecast the right time for buy and sell in the
Interpretation of MACD is easy to be used for traders. In
market in order to avoid lose and gain profits.
this study whenever the MACD crosses the zero upward, it
In this study four currencies, namely, EURUSD, GBPUSD,
means there is a buy opportunity while if the MACD crosses
the zero downward, there is a sell opportunity as shown in USDJPY, and USDCHF are assessed with the employment of
Figure 3.4. On the other hand, when the value of MACD in the MACD at which buy and sell signals are identified. The period
first period (hour) is less than zero and in the second and third of the present study is ten years which is beginning from
periods is more than zero, there is a buy signal in fourth January 2001.
period. While, when the value of MACD in the first period The currencies in this study evaluated separately to avoid
(hour) is more than zero and in the second and third periods is the effects of one indicator on the other’s result. That is, for
less than zero, there is a sell signal in fourth period. each currency the indicator applied and examined separately.
Hence, there are four currencies and one indicator and
combination of them are called traders. Accordingly, each one
of the four virtual traders works only with the indicator and
currency.

V. METHODOLOGY, DATA ACQUISITION AND ASSUMPTIONS

The present study is developed based on reviewing related
literature as mentioned in previous section. This section
summarizes the research design of this study. Figure 2
Fig. 1 4 Buy and sell signal from MACD indicator illustrates the methodology of the study to reach the defined
aims.
A. MACD advantages and Properties The data needed for this study are hourly opening, closing,
One of the basic advantages of MACD is its potential to high, and low prices as well as trade volume for four
incorporate the aspects of both trend and momentum in a currencies within 24 hours a day of weekdays started from
single indicator. As a trend-following indicator, MACD will January 2001 till December 2010. The data are collected from
not be erroneous for too long. Applying moving averages online data base of Foreign Exchange Market on MetaTrader
confirm that the indicator will finally follow the movements of software.

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indicator was calculated by the evaluated data. By using

unique formula in VHTS and default assumptions suggested
by its inventor, the indicator was calculated. Besides, all
formulas and assumptions were rechecked to avoid any
mistakes in VHTS. Furthermore, to make sure that the results
are reliable, the software has been run several times. It helped
us to answer the second research question: what are the hourly
values of the selected indicators for each currency?.

VI. DATA COLLECTION AND ASSUMPTIONS

After computing and interpretation of MACD indicator,
Fig. 2 The research process flow diagram VHTS provided the results as shown in Table 1. Even though
the results are different for each currency, it is considerable
that the circumstances of all currencies for using MACD are
The data are transmitted to spreadsheets with 60,000 rows the same; trading with the same assumptions and
for each currency. Frequency is hourly for the time period of interpretations. Moreover, the results indicate MACD is not a
2001-2010. An illustration of data on MetaTrader software is suitable indicator for these currencies with applying its
offered in Figure 3.The data then analyzed and processed in interpretations considering this study’s assumptions. However,
order to answer the first research question: what are the application of MACD for EURUSD is more profitable
volume and open, high, low and close prices for each currency compared to other currencies since it generated 182 pips
in hourly basis for the years 2001 -2010. profit. Although, this profit could not increase the capital due
to time which it is created.
Table I demonstrates results of implementing MACD for
four different pair-currencies which are shown in four separate
columns. First three rows are showing produced profit that is
split to two parts, sell and buy profit. The same thing is
displayed for loss in second three rows. The third three rows
are demonstrating total profit/loss and its sell and buy division.
Fourth three rows are showing the number of sell and buy
Fig. 3 An example of the data on MetaTrader software
transactions and total number of transactions for each pair-
currency. Finally, the last three rows are displaying ending
balance, last trading date and paid commission to broker.
MetaTrader as Forex trading online software that is used In this study following assumptions are formulated to combine
extensively by foreign exchange traders is one of the twenty conditions of traders. Accordingly, each trader was
significant tools used in this study. Buying and selling is prevented from any distractors of the results. The assumptions
feasible via this software for traders. MetaTrader has provided are formulated based on the experiences of the researcher in
graphs and charts of the indicator to facilitate traders’ Forex market, studying Forex market, capital management,
activities. and risk management.
Microsoft Excel software is another tool applied for • Trading period is considered for ten years (2001-2010),
processing and analyzing the data. Regarding to the fact that since, shorter period generates unreliable results and longer
calculations are based on each item as well as great volume of period makes data processing complex and difficult.
data, Virtual Historical Trader Software (VHTS) is developed • Only one of the four pair currencies, namely, EUR/USD,
based on Microsoft Excel. VHTS uses assumptions and trade GBP/USD, USD/JPY and USD/CHF can be traded by the
based on them on historical data. In addition, TA-Lib program traders. The reason for choosing these currencies is Oh’s
is added to Excel to increase accuracy of calculations by (2007) viewpoint that theorized European, North American
Microsoft Excel. and Japan Forex market are more efficient than other
VHTS is provided to create a virtual situation like the real foreign exchange markets and in its turn it helps to remove
trading circumstances for investors by applying the other variables’ effect on results.
assumptions. VHTS is able to compute indicator for each • Only one position can be opened by the traders at the same
period of spreadsheet or each row based on the data. time and once the new order is offered, the earlier one will
Moreover, sell and buy orders can be opened and closed based be closed.
on signals and assumptions generated by the indicator. Finally, • In 30 pips each order can take profit and stop loss. It makes
profit or loss for each/all order can be calculated by VHTS. the profits small and decreases the risks of losing large
In order to evaluate the effectiveness of using SAR indicator amount.
applied on four currencies, empirical method has been applied. • The order amount should be less than 7% of the traders’
To ensure that the data are required ones, historical data capital balance. It reduces
collected from Meta Trader software were evaluated. Then, the • For each trader the primary capital is $10,000.

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• The time for trading is upon receiving the buy or sale signal
from the indicators and it is 24 hours a day per 5 days a
week.
• In case there is no new order or a position do not attain the
level of take profit or stop loss, after 10 hours the order
automatically will be closed; hence, profit or loss will be
calculated based on the last 10 hours.
• No restriction has been considered for each order, because it
Fig. 5 Final percentage of EURUSD buy and sell using MACD
is only 7% of the capital balance.
indicator for the years 2001 to 2010
• The least amount of the order is 0.01 of the lot.
The ordering did not stop during 10 years period of this
TABLE I study which show the capital could reach to end of project.
SUMMARY OF THE FINAL OUTCOMES USING MACD INDICATOR AND ITS Moreover, the final profit generated by buy orders is 1706 pips
RELATED INTERPRETATIONS FOR THE YEARS 2001 TO 2010
which is resulted from 13165 pips profit and 11459 pips loss
while the final loss created by sell orders is 1524 pips which is
resulted from 11259 pips profit and 12783 pips loss. The
profit resulted from buy orders is more than loss from sell
orders and covered it and has extra 182 pips profit. This profit
generated by 1524 pips loss from sell transactions and 1706
pips profit from buy orders.
The more detail results of using this indicator for EURUSD
is given in Table II and as it is clear from the Table, 183 pips
profit created within first 10 years.

The spread or commission of the broker is based on real

TABLE II
market rate. However, this rate is different for every currency YEARLY OUTCOME OF TRADING EURUSD USING MACD INDICATOR
and time of the day. For example, the broker’s commission for
EURUSD and USDJPY currencies is one pip at 8 am to 8 pm,
while it is two pips at 9 pm to 7 am. For GBPUSD and
USDCHF currencies the broker’s commission is two pips
while it is four pips at 9 pm to 7 am.

VII. PROCESS
Results and discussion of the study are presented based on
In most of years the buy transactions generated profit while
applied methodology; that is, data collection, data assessment,
sell transactions resulted loss. Moreover, the MACD
data processing, and computing P-SAR by application of
interpretations made profitable signals in five years while there
VHTS. Then, by interpreting the indicator for the four
is loss in four years and one year is neutral. Moreover, Table
currencies EURUSD, GBPUSD, USDCHF and USDJPY, buy
4.8 shows MACD is producing more profitable buy signals
and sell signals have been determined. Afterward, based on the
compared to sell signals. However, the last result is positive
assumptions, proper trading software has been run to gain
and show profit but it could not add money to its capital due to
profit or loss of each currency regarding indicator application,
the time of generation. It means at the beginning of the study
therefore there are four virtual traders.
period the amount of capital is full and since each order is 7%
A. EURUSD of capital balance, the amount of order also would be big.
With the employment of MACD for EURUSD in order to Therefore, the loss or profit for beginning of study time area
identifying the signals to enter and exit the market, 1899 would be bigger compare to end of study period. Since at the
orders include 955 buy orders and 944 sell orders has been first MACD made loss the next generated profit had lower
proceeded. Total numbers of buy and sell of EURUSD with cash generation even their pips of profit are higher than their
the employment of Moving Average Convergence/Divergence previous pips of loss.
(MACD) indicator during ten years (2001-2010) is presented B. GBPUSD
in Figure 5.
There are 1856 transactions including 926 buy and 930 sell
orders which are created by employment of MACD indicator
for GBPUSD which continued trading until end of study time
scale. Total numbers of buy and sell of GBPUSD with the
employment of Moving Average Convergence/Divergence
(MACD) indicator during ten years (2001-2010) is presented
in Figure 6.

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The ordering is stopped in April 2009 since the capital was not
enough to continue the trading. It means trading with MACD
results loss more than benefit and it caused decreasing capital
while the time is passing. Moreover, the final loss created by
buy orders is 2309 pips which is resulted from 10146 pips
profit and 12455 pips loss while the final loss created by sell
orders is 2411 pips which is resulted from 10259 pips profit
Fig. 6 Final percentage of GBPUSD buy and sell using MACD and 12670 pips loss. Finally, there are 4720 pips loss created
indicator for the years 2001 to 2010 by sell and buy orders from 20405 pips profit and 25125 pips
loss.
As a result of those transactions 3314 pips loss has been
According to Table 4 there is no clear relationship between
made which included 24391 pips profit and 27705 pips loss. In
profit/loss of buy and sell transactions since in some years the
other word, 3007 pips loss of sell transactions and 307 pips
profit/loss of buy orders are opposite the profit/loss of sell
loss of buy transactions created 3314 pips final loss within ten
transactions and in some years the relationship is straight.
years. The 3314 pips loss which created by sell transactions
Finally the losses which generated by sell and buy orders are
included 11555 pips profit and 14562 pips loss. While, the 307
so close to each other.
pips loss generated by buy orders included 12836 pips profit
and 13143 pips loss. TABLE IV
Yearly details of profit and loss using the foresaid indicator YEARLY OUTCOME OF USDCHF TRADING USING MACD INDICATOR
for GBPUSD are presented in Table 3. The table shows the
progress of the 3314 pips loss production within ten years. As
it is clear in Table 4, the amount of profit in three years is
considerable while it has been covered by the other years’
losses. Moreover, it shows this indicator is producing more
profitable buy signals compared to sell signals.

TABLE III
YEARLY OUTCOME OF GBPUSD TRADING USING MACD INDICATOR
D. USDJPY
MACD signals for USDJPY results 1180 pips loss which
included 21665 pips profit against 22845 pips loss and the
trading period did not last within the ten years. This 1180 pips
loss contained 418 pips loss from sell transactions and 762
pips loss from buy transactions. There are 854 sell orders and
848 buy orders generated by MACD interpretations. Total
numbers of buy and sell of USDJPY with the employment of
Moving Average Convergence/Divergence (MACD) indicator
C. USDCHF during ten years (2001-2010) is presented in Figure 8.
With the implement of MACD for USDCHF in order to
discovering the signals to buy and sell the market, 1678 orders
include 832 buy orders and 846 sell orders has been
proceeded. Total numbers of buy and sell of USDCHF with
the employment of Moving Average Convergence/Divergence
(MACD) indicator during ten years (2001-2010) presented in
Figure 7.

Fig. 8 : Final percentage of USDJPY buy and sell using MACD

indicator for the years 2001 to 2010
Moreover, these sell orders made 418 pips loss which
includes 11010 pips profit and 11428 pips loss while buy
transactions generated 762 pips loss which includes 10655
pips profit and 11417 pips loss.
Table 5 showing the yearly details of buy and sell
Fig. 7 Final percentage of USDCHF buy and sell using MACD transactions, demonstrates that in the years 2002, 2006, 2009
indicator for the years 2001 to 2010
and 2010, MACD signals generated profit although the profits
were not enough to cover the losses created in the other years.
Therefore, by the end of the trading period the outcome left

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was loss. Furthermore, it can be seen that the sell signal • If a position do not reach to its level of take profit or stop
worked better compared to buy signals since they created loss and there is no new order, the order will be closed
profit in 2002, 2003, 2004, 2008, 2009 and 2010 and the final automatically after 10 periods (hours) and profit/loss is
loss of them is about half of buy orders’ loss. calculated based on the last 10 hours.
• There is no limitation in amount of each order since it is 7%
TABLE V
of the capital balance.
YEARLY OUTCOME OF USDJPY TRADING USING MACD INDICATOR
• Minimum order is 0.01 of the lot. These assumptions have
been chosen based on researchers’ experiences in Forex
market and studying Forex market, capital management and
risk management to make the result comparable and unify.
The following findings have been obtained from the current
study:
• MACD had better results with trading with EURUSD.
• The most effective combination of MACD-Currency
regarding generation of profit has been identified to be
MACD-EURUSD with considering the assumptions of this
VIII. ANALYSIS study. MACD performed not bad with EURUSD as it has
Final profit/loss of all four currencies trading with the created $8,068.53 cash at the end of ten years period of
employment of Moving Average Convergence/Divergence trading (Table 1).
(MACD) indicator for the period of ten years (2001-2010) is • The other finding was that the total loss generated
presented in Figure 9. by buy signals for all four traders is 1,672 pips however sell
signals generate 7,360 pips loss which the difference
is considerable. It shows MACD produces more profitable
buy signals than sell signals.
• One of the notable results generated from VHTS was
computing the amount of commission each trader has been
paid based on market rates. The commission paid is shown
in Table 1 indicating that brokers made profit regardless
of gaining or losing of traders

ACKNOWLEDGMENT
The special thanks go to our advisor Dr. Arash Habibi
Fig. 9 Final profit/loss with the employment of MACD
Lashkari for his guidance and advices in this project.
indicator for trading the four currencies within ten years
(2001-2010)
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