MACD and StochasticTuesday, 11 July 2017 19:17
The most successful Forex trading strategies are based on the correct selection of the indicators as well as the ability to combine them. The simultaneous use of the MACD and Stochastic indicators is quite popular and shows excellent results.
Both tools belong to the group of oscillators and give the user signals about the change in the direction of the price movement. Any trader knows that relying on the single oscillator is very dangerous, due to the false signals appearance. However, using two indicators at the same time, it becomes possible to filter the false signals, checking with the second indicator. Next, we will consider the work of such a strategy as well as each particular indicator, in detail.
Gerald Appel created this indicator within trading on the commodity markets. This tool also found the way to the stock exchange, and later became popular on the Forex.
The MACD looks like a bar chart with values fluctuating above and below the zero mark. At the same time, if the indications are positive, this means the bulls’ domination on the market, and in the case of the negative signs, it means that the bears have an advantage. Accordingly, the height of the columns indicates the strength of the market participants, at the moment.
The buy signal looks like an intersection of the signal line with a zero level. If the signal crosses it from top to bottom, it indicates a good opportunity for purchase, otherwise - for sale. However, it’s worth noting that the signals can lag significantly.
Using the MACD in the MT4 terminal, the user needs to configure three parameters. If you are not an experienced trader and haven’t studied the mechanism of the tool perfectly yet, it’s worth using the standard settings:
- Fast EMA (fast moving average period) - 12;
- Slow EMA (slow moving average period) - 26;
- SMA MACD (the period of the moving average representing the difference between the first two) - 9.
Most traders consider Stochastic the most valuable indicator of the oscillator type. This tool allows you to measure the market impulses, and also displays the price fluctuations, relative to the highs and lows. George Lane, the author of such an indicator, identified two most critical areas on the chart: the overbought zone (at values above 80%), and oversold (at values below 20%).
When the price reaches the overbought level, the probability of its reversal increases. In this case, the transaction for sale is open at the moment when the price crosses the mark of 80% from top to bottom. Accordingly, the purchase transaction is open when the price crosses the mark of 20% from the bottom to top.
Setting up the Stochastic, you need to set the following parameters:
- % K (period of the main line, the solid one) - 5;
- % D (period of slow MA, the dotted one) - 3;
- Slowing down % K (MA smoothing factor) - 3;
- The MA method - Simple;
- Prices (MA calculation method) - Low / High.
Trading with MACD and Stochastic
Before starting to work with this strategy, it’s worth noting that both of these indicators are the oscillators, which means they work best within the absence of a strong trend.
First, you need to configure both indicators and open them in the trading terminal. After that, you begin to search for the trend. If you are going to trade for the H1 period, the trend searching should be made at the period of H4. At the same time, the MACD chart is checked. The purchase transactions are made if the columns are located above zero and the transaction for sale - if the bars are placed below the zero mark.
The position is open if two Stochastic moving averages intersect at the H1 period. If the MAs meet in the overbought zone, then a sell order is opened. The buy order is open at the intersection in the oversold zone.
To minimize losses, you can set a stop-loss at the nearest level of resistance, or support.
This strategy is suitable for trading on any time frames, with any currency pairs. However, it’s also necessary to take into account certain features of such a method. Choosing long time frames, the number of transactions will decrease. Also, if you select too short time frames, the accuracy of the signals may fall.
For such reasons, we recommend you to try this method on a demo account, at different time intervals first, and only then start trading. Success will not take long to come!