MACD and Stochastic: A Double-Cross Strategy

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MACD and Stochastic: A Double-Cross Strategy

Any technical trader will tell you that the correct signal is required to accurately discern a change in course in a stock’s price patterns. What one “correct” indicator can accomplish for a trader, two suitable indicators can do better.

The purpose of this post is to urge traders to seek for and recognize a simultaneous bullish MACD crossing as well as a bullish stochastic crossover, and then utilize these indicators as an entry point to trade.

Key Takeaways

  • A technical trader or researcher seeking more information might gain more from combining the stochastic oscillator and MACD, two complementing indicators, than from looking at just one.
  • Separately, the two indicators operate on separate technical foundations and may be used independently; in comparison to the stochastic, which ignores market jolts, the MACD is a more trustworthy alternative as a solitary trading indicator.
  • The stochastic and MACD, on the other hand, are a great partnership that may deliver an increased and more successful trading experience.

Pairing the Stochastic and MACD

The coupling of the stochastic oscillator and the moving average convergence divergence was discovered while looking for two popular indicators that function well together (MACD).Because the stochastic compares a stock’s closing price to its price range over time, and the MACD is the construction of two moving averages diverging from and converging with one other, this team works. When exploited to its greatest extent, this dynamic combination is very powerful.

Working the Stochastic

Withinconsistencies were filled in the history of the stochastic oscillatoris. Most financial sites credit the stochastic oscillator to George C. Lane, a technical analyst who researched stochastics after joining Investment Educators in 1954. Lane, on the other hand, provided contradictory comments concerning the creation of the stochastic oscillator. It’s probable that it was invented by Ralph Dystant, the then-head of Investment Educators, or an unknown relative of someone inside the firm.

The oscillator was most likely devised by a group of analysts between Lane’s appointment at Investment Educators in 1954 and 1957, when Lane claimed copyright for it.

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The stochastic oscillator is made up of two parts: the%K and the%D. The main line indicates the number of time periods, and the moving average of the%K is the%D.

Understanding how the stochastic is produced is critical, but understanding how it will behave in various conditions is much more crucial. As an example:

  • When the%K line falls below 20, the stock is deemed oversold and a buying signal is issued.
  • If the%K reaches a high slightly below 100 and then falls, the stock should be sold before it falls below 80.
  • In general, if the%K value increases over the%D, this crossover indicates a buy signal, provided the numbers are less than 80. If they are higher, the security is deemed overbought.

MACD And Stochastic: A Double-Cross Strategy

Working the MACD

The MACD, as a flexible trading indicator that may disclose market momentum, is also valuable in identifying price patterns and direction. The MACD indicator is powerful enough to stand on its own, but its forecasting function is not perfect. When used with another indicator, the MACD may significantly increase the trader’s edge.

Overlaying a stock’s moving average lines over the MACD histogram is very beneficial for determining trend strength and direction. The MACD may also be seen as a histogram on its own.

MACD Calculation

A basic MACD calculation is needed to include this oscillating signal that swings above and below zero. An oscillating indicator value is calculated by subtracting a security’s 26-day exponential moving average (EMA) from its 12-day moving average. When a trigger line (the nine-day EMA) is added, the two are compared to provide a trading picture. A bullish moving average crossing occurs when the MACD value exceeds the nine-day EMA.

It’s worth noting that there are a few well-known methods to employ the MACD:

  • The most important thing to look for is divergences or a crossing of the histogram’s center line; the MACD shows purchase chances above zero and sell opportunities below zero.
  • Another thing to keep an eye out for is shifting average line crossings and their connection to the center line.
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Integrating Bullish Crossovers

To understand how to include a bullish MACD crossing and a bullish stochastic crossover into a trend-confirmation method, the term “bullish” must first be defined. Bullish refers to a strong indication that prices will continue to rise indefinitely. A bullish signal occurs when a quicker moving average crosses over a slower moving average, increasing market momentum and implying additional price gains.

  • In the case of a bullish MACD, this will happen when the histogram value is higher than the equilibrium line, as well as when the MACD line is higher than the nine-day EMA, commonly known as the “MACD signal line.”
  • The bullish divergence of the stochastic happens when the%K value crosses the%D, signaling a potential price reversal.

Crossovers in Action: Genesee & Wyoming Inc.

The example below shows how and when to employ a stochastic and MACD double-cross.

Take note of the green lines indicating when these two indicators moved in sync, as well as the near-perfect cross on the right side of the chart.

Image by Sabrina Jiang © Investopedia2020

There are a few occasions where the MACD and stochastics come near to crossing at the same time: January 2008, mid-March and mid-April, for example. On a chart this big, they even seem to cross at the same time, but a closer examination reveals that they did not cross within two days of each other, which was the condition for putting up this scan. You may wish to adjust the parameters to include crossings that occur over a broader time range in order to catch movements like the ones illustrated below.

Changing the parameters of the settings may assist establish a longer trendline, which can help a trader avoid a whipsaw. This is achieved by increasing the interval/time-period parameters. This is known colloquially as “smoothing things out.” Of fact, active traders utilize far shorter periods in their indicator settings and would refer to a five-day chart rather than one with months or years of price history.

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The Strategy

First, watch for bullish crossings within two days of each other. When using the stochastic and MACD double-cross approach, the crossover should occur below the stochastic 50-line to capture a lengthier price move. And, ideally, you want the histogram value to be or climb above zero within two days after making your trade.

Also, keep in mind that the MACD must cross slightly after the stochastic, or otherwise you will get a misleading signal of the price movement or be stuck in a sideways trend.

Finally, it is safer to trade equities above their 200-day moving averages, although this is not a must.

Special Considerations

The benefit of this technique is that it allows traders to wait for a better entry point on an uptrending stock or to be certain that any downturn is actually correcting itself when bottom-fishing for long-term holdings. Where charting software allows, this method may be converted into a scan.

There is always a drawback to every benefit that every plan brings. Because the stock takes longer to line up in the optimum purchasing position, trading in the stock happens less often, thus you may need a bigger basket of stocks to monitor.

The stochastic and MACD double-cross enables the trader to adjust the intervals, allowing him to identify optimum and consistent entry opportunities. This allows it to be tailored to the demands of both active traders and investors. Experiment with both indicator intervals to observe how the crosses change, then choose the number of days that works best for your trading strategy. You could also wish to throw in a relative strength index (RSI) indicator for good measure.

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