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.