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PSE Stock Trading: MACD & Stochastic As Trading Strategy

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You need the right indicator if you want to determine the change in the stock price pattern accurately. One indicator is enough but may not sufficient. Having two or more indicators will, therefore, do a better job. Thus, by using the stochastic cross over and the bullish MACD crossover, you can accurately predict the trend and place your trades.

The MACD is mostly used to filter false trading signals. On the other hand, the stochastic indicator helps in generating the buying and selling signals.

To use the MACD as a strategy, there are a few rules that can be followed. When it is above 0.0 levels, it indicates an uptrend.

The stochastic indicator should cross over at around the 20 lines. The region represents the oversold area. When you buy in such a case, the buy stop order should be placed at least two pips above its highest point.  On the other hand, the stop loss should be placed 5 pips below the candlestick or 2 pips below the lowest of the nearest swing. The risk-taking profit ratio in such a case should be 1:2

Rules for selling

  • If you want to sell, it is essential to ensure that the MACD is below 0.0 levels. At this level, it shows that it is a downtrend. Take note of the fact that it will cross over at the overbought region. Basically, this region should be around 80 lines.
  • The stop loss can be placed at least 2 pips below the lowest point of the wave.
  • Alternatively, the stop loss may be placed 5 pips above the tip of the candlestick. Also, you may place it 2 swings above the nearest swings.
  • The risk-reward ratio should be 1:2 above the take profit. You may also utilize previous swing low in determining the take profit point.

How to pair the MACD and Stochastic

These are two popular indicators that can be paired to produce desired results. The MACD (Moving average convergence divergence) and stochastic oscillator work hand in hand. The stochastic compares the price range and stock closing price over a range of periods. On the other hand, the MACD is formed where the moving average diverges or converges with each other.

Typically, the stochastic has two components the %D and the %K components. The % K indicates the number of periods, while the %D indicates the %K moving average. 

One needs to understand how the stochastic will formed and how it will respond to different situations. It will help them to understand and use it effectively.

Usually, when the percentage K line drops to below 20, it shows that the stock is oversold, so it indicates that the bulls will be taking charge. This point, the trader should place a buy. On the other hand, if the % K peak is below 100, it suggests that one should sell the stock before its value drops.

Double cross strategy

As mentioned, the stochastic and MCD is a useful trading strategy. The MACD is critical in helping to identify the direction and the price trend.  The MACD can stand on its own and used it alone. Unfortunately, when you do this, it will not give you an absolute solution. Thus, it must be used alongside other indicators. But it is one of those tools that can provide the trader with an added advantage if used appropriately.

MACD Calculation

It fluctuates below and above zero. It can be attained by subtracting the twenty-six day EMA from the twelve-day EMA. It gives some swinging, but when you add the 9- day EMA (Trigger line), you end up with a trading pattern. So if the MACD is above the 9-day EMA, it forms a moving average cross over that is bullish.

How to use MACD

We watch for divergences and crossovers of MACD and the zero line. It is a buy above the zero and a selling opportunity when it is below the zero lines.

Bullish crossover identification and integrating them

It helps to integrate the bullish stochastic crossover and MACD crossover. The word bullish will need to be used. When used in this case, it denotes a strong signal that supports the rising prices. As a result, a bullish signal will be generated when an accelerated moving average crosses a slower moving average. It creates a market momentum that will lead to an increase in price.

The bullish MACD occurs when the values of the histogram rise above and beyond the equilibrium line. It also happens when the value of the MACD line is higher than that of the 9 Day EMA. At this point, it is referred to as the signal line. The Bullish divergence will occur when the %K value overtakes the % D. It is an indicator that the price may turn around any time.

Trading using strategy

 To trade using this strategy, the first thing you will need to do is to look where the bullish cross over is likely to occur. If it occurs below the fifty MA line, you are likely to enjoy a longer price movement. The histogram should move above zero to allow you to place a trade. The MACD must cross the stochastic. Anything short of this is likely to create a false indicator.

This strategy gives the trader a chance to hold out for an entry point, especially when the stock’s price is rising. It also helps to figure out when the downtrend is reversing after hitting bottom.

The problem with the strategy is that the stock may take a more extended period to line up. It means that it may take long before determining the best time to buy the shares. So, it may require that you invest more capital to use to buy a basket of stocks. Besides, you must find the optimal entry points, which may be a challenge when the MACD and the stochastic double-crosses. Thus, choosing the day with the best trading style may be tricky. It may force you to include an RSI indicator in the mix.

Conclusion

The MACD function and the stochastic oscillator can work independently or jointly. But MACD is more reliable since it is less susceptible to market jolts. As a result, it can be used as a trading indicator. However, you will be better off using two indicators than any one of them. When you pair them, you get an enhanced trading experience.

MACD and Stochastic
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