MACD versus Bollinger Bands

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In this comparison MACD is obviously the superior performing system. Not only does it enjoy a better P:MD, but it does so while enjoying a higher percentage of winning trades, better profit-to-loss ratio, and fewer consecutive losses. So why would anyone choose to trade the Bollinger bands system?

The most obvious reason is that MACD's results were achievable only if one had the prerequisite $200,000 in equity under management needed to withstand its maximum drawdown. If one had only $100,000 under management, employment of MACD would entail the weathering of a 42.55 percent maximum drawdown (compared to a 28.32% drawdown for the Bollinger band system). Moreover, remember that MACD's superior performance was only achievable if one had the patience and fortitude to hold trades for an average of 143 days.

If a trader showed me the results from Tables 3.10 (Bollinger bands) and 3.6 (MACD), then asked which I thought was the better trading strategy, I would pose four questions:

1. How much equity is available to trade this strategy?

2. Are you more comfortable holding a trade an average of 15 or 143 days?

3. Is it easier for you to hold fewer trades and always have a position in the market or to trade with greater frequency and be out of the market around 49 percent of the time?

4. Do you possess the discipline and fortitude required to stick with a trading system that will endure 17 consecutive losses, or is withstanding 7 a more realistic accomplishment?

Obviously there is no single right or wrong answer to these questions; it all depends on an individual trader's temperament. Although the answers to these questions are of far greater importance than theoretical backtested returns on investment, most traders will continue dedicating investment capital to a system based on its theoretical returns irrespective of their psychological compatibility with that system.

The point is, unless someone's personality is well suited to trading a particular system over the next 10 to 30 years, "theoretical" returns are destined to remain just that: theoretical. The implementation of an incompatible system will raise all the same psychological issues as trying to trade without a system—a breakdown in discipline, lack of patience, and an inability to withstand drawdowns in equity, consecutive losses, and low winning percentages.


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