The McClellan Oscillator

A few months ago while exchanging ideas with fellow StockTwits user Brendon Chan he suggested I take a look at the McClellan Oscillator when trading using mean reversion strategies. I was more than willing to add this indicator in my toolbox since I didn’t have many breadth indicator implemented in my systems.

The first thing to do was to learn what it was and how to calculate it so I could implement it, I found most of the information I needed on and voila! :

McClellan10years

I skipped over most of the interpretation section of the stockchart.com definition and tried to figure out a simple pattern I could code to trade broad Index ETFs. Here is a visual demonstration of what I came up with:
McClellanDetails

So in other words, a buy signal happens when the McClellan Oscillator’s histogram gets to a certain level and starts to recover, 3 bars are used to guess that it’s starting to recover.

Using a buy threshold of 45 and a sell threshold of 65 (inverse values for shorting). Gives above a pretty good win rate over a 10 years period for SPY(75%) and QQQ(79%).

McClellan10yearsSPYPerf

McClellan10yearsQQQPerf

But this exercise, while interesting is not why I was investigating this indicator, I was more interested to see if it could help make my swing systems more profitable. So I went and added a very simple condition before entering a position in my swing trading system: Buy only if the McClellan Oscillator histogram value for the day is below 0, and short only if the McClellan Oscillator histogram value for the day is above 0. So in other words, buy only if markets are oversold (not just 1 stock).

Here are the results for all picks I’ve posted since july 2014:

Without using the McClellan Oscillator rule:

Total published picks 2638
Total selected picks 777
Total winners 634(81%)
Total long winners 214(78%)
Total short winners 420(83%)
Average transaction Profit/Loss 1.41%
Average Profit/Loss for winners 4.19%
Average Profit/Loss for loosers -10.94%
Average Profit/Loss for long positions winners 3.71%
Average Profit/Loss for short positions winners 4.44%
Profit Factor 1.70%
Total Profit/Loss when investing 1000$ per position 10960.42$

 

Using the McClellan Oscillator rule:

Total published picks 2638
Total selected picks 581
Total winners 487(83%)
Total long winners 178(81%)
Total short winners 309(85%)
Average transaction Profit/Loss 1.81%
Average Profit/Loss for winners 4.15%
Average Profit/Loss for loosers -10.31%
Average Profit/Loss for long positions winners 3.61%
Average Profit/Loss for short positions winners 4.47%
Profit Factor 2.08%
Total Profit/Loss when investing 1000$ per position 10552.79$

 

I find these results very interesting while there are a bit less positions taken, it pushed the profit factor from 1.7% to 2.08% as well as the win rate.  So it looks like the McClellan Oscillator can be a good tool to add to swing strategies. I’ll certainly consider it in my future developments.

 

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