Thread by @quantscience_

How to use MACD for algorithmic trading Machine Learning.

Let's dive in. 🧵

MACD (Moving Average Convergence Divergence) is most commonly used in Technical Trading.

But, it can be used as part of a factor model.

Let's see how.

1. What is MACD?

MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price.

The MACD is calculated by subtracting the long-term exponential moving average (EMA) from the short-term EMA.

2. Components of MACD:

MACD Line: This is calculated by subtracting the 26-period EMA from the 12-period EMA.

Signal Line: This is a 9-period EMA of the MACD Line itself.

MACD Histogram: This is the difference between the MACD line and the Signal line.

3. How MACD is used:

The primary method is to look for crossovers between the MACD line and the signal line.

When the MACD line crosses above the signal line, it is a bullish signal.

Conversely, when the MACD line crosses below the signal line, it is a bearish signal.

4. Factor model with MACD

We can add MACD as features.

These features power our Machine Learning models.

And allow us to predict: 1D, 5D, 10D, and 21D returns forecasts.

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