MACD And CandleStick Case Study - FibreChem

http://stockstudent.blogspot.com/2008/02/macd-and-candlestick-case-study.html

MACD And CandleStick Case Study - FibreChem

I have received comments on whether we can use MACD crossover to trade directly instead of combining it with Candlestick pattern.

My personal view is if you use purely the MACD crossover to trade, there will be too many trading signals. And the quality of the trading signals may not be good.

I have chosen to do a case study for Fibrechem Technologies just to illustrate this point.

Price data is from Aug 19 2004 to Feb 15 2008

Firstly, let’s do a pure MACD crossover trade. The rules are as follows:

Entry Rules:

1. MACD histogram crosses above the zero line


2. Buy on the next day at 1 bid above the current day’s high


3. Set the stop loss at 1 bid below the current day’s low


4. Set the profit target to be 10% above the entry price

Exit Rules:

1. Stop loss price has been hit or


2. MACD histogram crosses below the zero line or


3. Profit target has been hit

The following trades were made:

Now we put in the Candlestick Inside Day pattern and see what the outcome is. The rules are:

Entry Rules:

1. MACD histogram > 0


2. High of current day < class="MsoNormal">Low of current day > Low of previous day


3. Open of current day < class="MsoNormal">If conditions 1 to 4 are met, buy on the next day at 1 bid above the current day’s high.


4. Set the stop loss at 1 bid below the current day’s low


5. Set the profit target to be 10% above the entry price

Exit Rules:

1. Stop loss price has been hit or


2. MACD histogram crosses below the zero line or


3. Profit target has been hit

The following trades were made:

You can see that reduces the number of trades. With the Inside Day Candlestick pattern, there were only 4 trades made. Without the Inside Day Candlestick pattern, we have 17 trades.

With the Inside Day Candlestick pattern, probability of win is at 75% compared to 47% for the case where there Inside Day pattern is not used.

You can also experiment with different Candlestick pattern to see if it helps to filter out non-profitable trades.

MACD And Candlestick Case Study - Midas

I received a request to do a case study on MIDAS Holdings. The data that I am using is from 23 Feb 2004 to 15 Feb 2008.


The same trading rules apply. The trades done are shown below:


The result is similar to Ferro China. 6 trades hit the profit target of 10%. There were 4 losses. However, losses were small when compared to the gains.

As a whole, this shorting method is still profitable when applied to MIDAS Holdings.

MACD And CandleStick

Candlestick chart originated in Japan a few centuries ago and has been used by Traders to identify profitable trading opportunity.

One way of using candlestick is to put it together with trend or momentum indicator such as MACD. MACD is an indicator derived from 12 day and 26 exponential moving averages of a stock price.

A candlestick pattern that is of interest to traders is the inside day bar. Inside day bar occurs when the current price bar is completely engulfed within the range of the previous price bar.

Let’s do a case study on Ferro China, a company listed in Singapore. I will consider the short selling strategy for this study. Data is from May 19 2005 to Feb 14 2008.

Entry
1. High of current day < High of previous day
2. Low of current day > Low of previous day
3. Open of current day > Close of current day. The current day is a black candle.
4. MACD histogram is < 0
5. If conditions 1 to 4 are true, short sell the next day at price below the current days low.
6. Set the stop loss price to the current day high
7. Set the profit target to 10% above the entry price

Exit
1. Stop loss price has been hit or
2. MACD histogram is > 0 or
3. Profit target has been hit

The following trades were made


5 trades hit the profit target of 10% and there were 3 losing trades. Probability of win is 62%.

One advantage of using the inside day bar to set entry and exit point is that the risk is usually small compared to the potential upside.