MACD and Stochastic trading strategy

Ask any technical trader and he or she will tell you that the right indicator is needed to effectively determine the change of course in the stock price models. But one thing that the "right" indicator can do to help the merchant, two complementary indicators can do better. This article aims to encourage traders to look for and identify both bullish MACD crossover along with a bullish stochastic crossover and then use this as an entry point in the trade.

Matching Stochastic and MACD
Looking for two popular indicators that work well together resulted in the pairing of the stochastic oscillator and moving average convergence divergence (MACD). This team works as a comparison of stochastic closing stock price of its price range over a certain period of time, while the MACD is the formation of two moving average convergence and different from each other. This dynamic combination is very effective if used to its fullest potential. (For background reading on each of these indicators, see Understanding Oscillators: Stochastics and guide for the MACD.)

Work on Stochastic
There are two components of the stochastic oscillator: the% K and% d. The% K is the main line indicates the number of periods, and% D is a moving average of% K..

Understanding how stochastic is formed is one thing, but knowing how to react in different situations is more important. For example:

Common triggers occur when the% K line falls below 20 - the stock is considered oversold, and that is buy signal.
If the% K peaks just below 100, then heads down, the stock should be sold before the value falls below the 80th
Generally, if the% K value rises above the% D, then buy signal is indicated by this crossover, under the values ​​are below the 80th If they are above this value, security is considered overbought.

As a versatile trading tool that can reveal the price momentum, MACD is also useful in determining the price trend and direction. MACD indicator has enough strength to stand alone, but the predictive function is not absolute. It is used with another indicator, the MACD can really ramp up the advantage to the merchant. (Learn more about online trading momentum trading discipline.)

If the trader to determine trend strength and direction of the stock, moving average lines overlaying the MACD histogram is very useful. The MACD, can also be viewed as a histogram alone. (Learn more Introduction to the Histogram MACD.)

MACD Calculation
To bring this oscillating indicator that varies above and below zero, a simple MACD calculation is required. By subtracting the 26-day exponential moving average (EMA) of the cost of safety of 12 days moving average of its price, oscillating indicator value comes into play. Once the trigger line (the nine day EMA) is added, the comparison of two trading creates the image. If MACD value is greater than nine-day EMA, then it is considered a bullish moving average crossover.

It is useful to note that there are several known ways to use the MACD:

Above is the view of the crossover differences or center line of the histogram, the MACD Buy illustrates opportunities above zero and sell options below.
Another is the perception of moving average line Crossovers and their relationship to the central line. (For more, see Trading divergence of MACD.)

Identifying and integrating bullish Crossovers
In order to determine how to integrate with bullish MACD crossover and bullish stochastic crossover in trend-confirmation strategy, the word "bullish" should be explained. In the simplest of terms "bullish" refers to a strong signal to the ever increasing prices. Bearish signal is what happens when the faster moving average crosses above the slower moving average, creating market momentum and further indicates the price increases.

In the case of a bullish MACD, it will happen when the histogram value is above the equilibrium line, and also when the MACD line is of greater value than nine day EMA, also called the "MACD signal line."
Bullish divergence on the stochastic occurs when the% K value adopted% D, confirming a likely cost a turn.

Crossovers in action: Genesee and Wyoming Inc (NYSE: GWR)
Below is an example of how and when to use stochastic and MACD double cross.

Note the green lines that appear when these two indicators moved in almost perfect Sync and cross on the right side of the table.

You may notice that there are several instances when MACD and stochastics are close to crossing the same time - in January 2008, in mid-March to mid April, for example. It even looks like you do not move at the same time table of this size, but when you take a closer look, you see that they actually move in within two days of each other, a criterion for setting this scan. You may want to change the criteria so as to crosses that occur within a broader time frame, so you can catch up to those shown below.

It is important to understand that changing the settings parameters can help to produce extended trendline, which helps a trader avoid whipsaw. This is achieved by using higher values ​​in the interval / time settings. This is commonly called "smoothing things out." Active traders, of course, use much shorter time frames and indicator settings reference chart for five days instead of one for months or years of price history.

First, look for bullish Crossovers occur within two days of each other. Keep in mind that the application of stochastic and MACD cross double strategy, ideal crossover occurs below 50 line stochastic capture several price ranges. And preferably, you want the histogram value of being or moving higher from scratch within two days of placing the trade.

Also note that the MACD cross has little by stochastic, as an alternative you can create a false indication of the price trend or where you sideways trend.

Finally, it is safer to trade stocks that are trading above the 200-day moving average, but it is not an absolute necessity.

The advantage
This strategy gives retailers the opportunity to hold out for a better entry point uptrending stock or any surer that the downtrend has really changed when bottom fishing for a long term. This strategy can be turned into a scan where charting software licenses.

The damage
With every advantage that any strategy presents, there is always a lack of technique. Because stocks usually takes longer to line up the best buying position, actual trading of stocks happens rarely, so you may need a bigger basket of stocks to watch.

Trick of the trade
The stochastic and MACD double cross allows the merchant to change the intervals, finding optimal and consistent entry points. In this way you can tailor to the needs of both active traders and investors. Experiment with both indicator intervals and see how differently Crossovers line, and then select the number of days that work best for your trading style. You may also want to add the RSI indicator to the mix, just for fun. (Read RSI Rollercoaster Ride For more information about this indicator.)

Also, the stochastic oscillator MACD and the function of different technical areas and work alone. Compared with the stochastic, which ignores the market blows, the MACD is more reliable option as the only indicator for trading. However, just as two heads, two indicators are usually better than one! The stochastic and MACD are an ideal pairing and can provide for improved and more efficient trading experience.

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