Tradewinds Plantation MACD Trading

The moving average convergence divergence (MACD) is a trading model developed by Gerald Appel in the late 1970s. Till this day, it is still being used by investors to identify entry and exit trades for trading.

The basic indicators used for constructing the MACD trading model is the 12 day moving average and 26 day moving average.

There are a number of software that can generate MACD chart. However, it is good to understand how the indicator is constructed so as to better appreciate the value of the MACD indicator.

The steps to construct MACD are as follows:

1. Compute the 12 day exponential moving average based on the closing price. Let’s call this MA1
2. Compute the 26 day exponential moving average based on the closing price. Let’s call this MA2
3. MACD = MA1 – MA2
4. Compute MACD Signal line which is the 9 day exponential average of MACD.

One way of using the MACD signal is to buy when the MACD cuts above its signal line and to sell when MACD cuts below its signal line.

Let’s take a look at how this indicator performed on an actual stock. I have chosen Tradewinds Plantation Bhd as an example. The price data is from 2003 to 28 Mar 2008. Please refer to the chart above. The "Red" line is the MACD indicator. The "Green" line is the MACD Signal line. The "Blue" histogram is the MACD histogram.

The trade record is as follows:

For winning trades

Entry Date	Entry Price	Exit Date	Exit Price	% Change
3/26/2003	0.8	5/1/2003	0.8	0
5/7/2003	0.81	6/19/2003	0.89	9.88
7/3/2003	0.96	7/24/2003	0.9612	0.12
8/5/2003	1.0216	9/5/2003	1.129	10.51
9/19/2003	1.2863	10/7/2003	1.469	14.2
12/30/2003	1.1528	1/23/2004	1.16	0.63
2/16/2004	1.1706	3/15/2004	1.2895	10.16
8/31/2004	1.09	9/24/2004	1.0904	0.03
10/8/2004	1.0893	10/11/2004	1.0893	0
3/16/2005	0.8996	5/4/2005	0.9	0.05
6/13/2005	0.7924	7/4/2005	0.9504	19.95
7/26/2005	1.0411	8/12/2005	1.1197	7.55
12/19/2005	1.1101	2/10/2006	1.2206	9.96
2/16/2006	1.29	2/24/2006	1.29	0
3/16/2006	1.4096	4/4/2006	1.4108	0.09
4/5/2006	1.481	4/20/2006	1.5806	6.72
4/21/2006	1.611	5/15/2006	1.8585	15.36
6/22/2006	1.5503	8/9/2006	1.8201	17.41
10/12/2006	1.7	12/13/2006	1.9691	15.83
3/16/2007	1.88	4/27/2007	2.09	11.17
5/18/2007	2.3694	6/29/2007	3.06	29.15
8/28/2007	2.61	11/22/2007	3.5	34.1
11/30/2007	3.82	12/14/2007	3.84	0.52
				9.2778261

For losing trades

Entry Date	Entry Price	Exit Date	Exit Price	% Change
12/2/2003	1.3358	12/17/2003	1.1488	-14
5/6/2004	1.15	5/10/2004	1.1284	-1.87
5/27/2004	1.2089	7/20/2004	1.1297	-6.55
11/4/2004	1.0496	11/30/2004	1.0304	-1.83
12/8/2004	1.0696	12/13/2004	1.03	-3.71
1/10/2005	1.04	1/19/2005	1	-3.85
2/9/2005	0.99	2/21/2005	0.96	-3.03
9/9/2005	1.1997	9/23/2005	1.17	-2.48
10/3/2005	1.2603	10/18/2005	1.25	-0.82
8/14/2006	1.9803	8/21/2006	1.87	-5.57
12/28/2006	2.0503	1/11/2007	2.0402	-0.49
2/13/2007	2.07	2/28/2007	1.8605	-10.12
5/7/2007	2.3979	5/11/2007	2.0803	-13.25
1/1/2008	3.98	1/17/2008	3.96	-0.5
2/6/2008	3.76	3/11/2008	3.52	-6.38
				-4.963333

The average winning trade size is 9.2% whereas the average losing trade is -4.96%. The winning size is about 2 times the losing size. With proper money management and stop loss mechanism, this can be improved further.

Looking at the chart for Tradewinds Plantation, the MACD indicator is about the cut above it’s signal line. So if you trade based on MACD, time to get ready.