MACD entry strategy

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MACD entry strategy

This is one of best strategies for new traders. You can actually use it in different ways to determine trend and also reversals and of course signals for trading. Best time frames to use it are short but you can apply it to any time frame. The strategy itself deserves that their author is also written, in this case this is James Ayetemimowa. As we said, it is simple strategy that uses MACD. Good thing is that it follows the trend and uses more then one indicator to determine entry point which is great for binary options trading.

STRATEGY SETUP

INDICATORS TO USE ONA CHART:
– 50 SMA (GREEN)
– 100 SMA (RED)
– MACD (DEFAULT SETTINGS – 12, 26, 9)

TIME FRAME:
– 5 MIN or anything else you like

HOW IT WORKS:

As you can see the setup itself is simple and it is based on a 5 minute time frame so the signals come regulary. With the two moving averages you determine the trend, type of trade. These two SMAs determine your position, when the 50 bar SMA is above the 100 bar SMA means that the trend is bullish so it goes up. When the short 50 bar SMA is below the 100 bar SMA means that trend bearish and it will go down. As you can see, you only trade when this happens, you do not anticipate and trade before it crosses. You will see the signal will be made when the MACD is overbough or it will be oversold, that is when it will crossover and at the same time the price will go past the SMA. This means that when trend is downfall you will have to wait for price to correct itself above moving average. So when this event happens you will get signal when MACD oscillator is on the overbough side and of course makes bearish cross over. You can predict this cross over with MACD histogram. Check also the picture and you will see what i mean.

FINALE

This is a very well thought strategy even for beginners as we said but that does not mean it is not good for expirienced traders aswell. You can use this strategy for every asset you wish to trade on any time frame basicly. But please have in mind money management at all times. As you see it also does not need to check multiple time frames but it will not hurt if you do your analysis since you can only benefit from that. Even though it is simple strategy it can be very well trusted since it give you the right trend and momentum from which you can see signals to use for binary options trading.

How to Enter Trades using a MACD Crossover

Many traders look for opportunities to trade during volatile market conditions and while these periods offer great opportunities, the importance of timing cannot be ignored.

The aim of this article is to give traders a better understanding of the MACD crossover and to demonstrate how it can be used in Forex trading.

The MACD Crossover: What is it?

The Moving Average Convergence/Divergence ( MACD ) is a technical indicator which uses the difference between two exponential moving averages to determine the momentum and the direction of the market. The MACD crossover occurs when the MACD line and the signal line intercept, often indicating a change in the momentum/trend of the market. The MACD is seen as an effective indicator , especially in trending markets.

Components of the MACD:

  • The MACD line : The MACD line (blue line) is the difference between the two exponential moving averages (usually the last 12 and 26 days or weeks) and is usually referred to as the faster line.
  • Signal line : The signal line is usually a 9 period exponentially smoothed average of the MACD line and will be referred to as the slower line.
  • Zero line : The MACD lines fluctuate above and below a zero line, giving the MACD the qualities of an oscillator.
  • Histogram : The histogram consists of vertical lines that show the spread between the two MACD lines.

Using the MACD Crossover in a Forex Trade

3 helpful ways to use the MACD crossover in a forex trade

  1. MACD crossover as an entry trigger
  2. Using divergence to determine momentum with crossover as confirmation
  3. MACD crossover to filter signals

1. MACD crossover as an entry trigger

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Having a strong entry strategy can increase the probability of success by confirming the direction of the trend before entering a trade.

In the case of the MACD crossover, the most widely used entry signal is when the MACD line crosses over the signal line in the direction of the trend.

A bullish signal is present when the MACD line crosses ABOVE the signal line and is below the zero line. When the crossover takes place, traders may look for confirmation of an upward trend by waiting for the MACD line to cross over the zero line before opening a long position.

Likewise, a bearish signal is present when the MACD line crosses BELOW the signal line and is above the zero line. Once again, confirmation can be seen when the MACD line crosses below the zero line.

2. Using divergence to determine trend with crossover as confirmation

In periods of high volatility, or strong trending markets, divergence can be extremely helpful when looking at the momentum of the trend.

Divergence can be defined as the separation of price action from an indicator. An example of divergence can be seen on the GBP/NZD 2 hour chart below where the market shows a series of new highs on the price chart but the MACD indicator shows lower highs. Divergence is often a symptom of reversal as it suggests that the trend is beginning to lose momentum.

When this occurs, traders may use the next crossover as confirmation of a market correction/reversal before entering a position in the opposite direction.

3. Using the MACD crossover to filter signals in direction of trend

Traders who believe that ‘ the trend is your friend’ may find the MACD crossover to be a useful tool when looking to filter signals in the direction of trend.

To identify an upward trend, a trader can look at crossovers that occur when the price chart is showing higher highs and higher lows. Another way to identify an upward trend would be to look at the MACD line (the blue line) relative to the zero line. When the MACD line is above the zero line, this means that the trend is up. Traders who follow the trend will only look for buy opportunities when the trend is up. The opposite criteria would apply to traders looking for opportunities to sell.

MACD and Stochastic: A Double-Cross Strategy

Ask any technical trader and they will tell you the right indicator is needed to effectively determine a change of course in a stock’s price patterns. However, anything one “right” indicator can do to help a trader, two compatible indicators can do better.

This article aims to encourage traders to look for and identify a simultaneous bullish MACD crossover along with a bullish stochastic crossover and use these indicators as the entry point to trade.

Key Takeaways

  • A technical trader or researcher looking for more information can benefit more from pairing the stochastic oscillator and MACD, two complementary indicators, than by just looking at one.
  • Separately, the two indicators function on different technical premises and work alone; compared to the stochastic, which ignores market jolts, the MACD is a more reliable option as a sole trading indicator.
  • However, the stochastic and MACD are an ideal pairing and can provide for an enhanced and more effective trading experience.

Pairing the Stochastic and MACD

Looking for two popular indicators that work well together resulted in this pairing of the stochastic oscillator and the moving average convergence divergence (MACD). This team works because the stochastic is comparing a stock’s closing price to its price range over a certain period of time, while the MACD is the formation of two moving averages diverging from and converging with each other. This dynamic combination is highly effective if used to its fullest potential.

Working the Stochastic

The history of the stochastic oscillator is filled with inconsistencies. Most financial resources identify George C. Lane, a technical analyst who studied stochastics after joining Investment Educators in 1954, as the creator of the stochastic oscillator. Lane, however, made conflicting statements about the invention of the stochastic oscillator. It’s possible the then-head of Investment Educators, Ralph Dystant, or even an unknown relative from someone within the organization, created it. 

A group of analysts most likely invented the oscillator between Lane’s arrival at Investment Educators in 1954 and 1957, when Lane claimed the copyright for it. 

There are two components to the stochastic oscillator: the %K and the %D. The %K is the main line indicating the number of time periods, and the %D is the moving average of the %K.

Understanding how the stochastic is formed is one thing, but knowing how it will react in different situations is more important. For instance:

  • Common triggers occur when the %K line drops below 20—the stock is considered oversold, and it is a buying signal.
  • If the %K peaks just below 100 and heads downward, the stock should be sold before that value drops below 80.
  • Generally, if the %K value rises above the %D, then a buy signal is indicated by this crossover, provided the values are under 80. If they are above this value, the security is considered overbought.

MACD And Stochastic: A Double-Cross Strategy

Working the MACD

As a versatile trading tool that can reveal price momentum, the MACD is also useful in the identification of price trends and direction. The MACD indicator has enough strength to stand alone, but its predictive function is not absolute. Used with another indicator, the MACD can really ramp up the trader’s advantage.

If a trader needs to determine trend strength and direction of a stock, overlaying its moving average lines onto the MACD histogram is very useful. The MACD can also be viewed as a histogram alone.

MACD Calculation

To bring in this oscillating indicator that fluctuates above and below zero, a simple MACD calculation is required. By subtracting the 26-day exponential moving average (EMA) of a security’s price from a 12-day moving average of its price, an oscillating indicator value comes into play. Once a trigger line (the nine-day EMA) is added, the comparison of the two creates a trading picture. If the MACD value is higher than the nine-day EMA, it is considered a bullish moving average crossover.

It’s helpful to note there are a few well-known ways to use the MACD:

  • Foremost is the watching for divergences or a crossover of the center line of the histogram; the MACD illustrates buy opportunities above zero and sell opportunities below.
  • Another is noting the moving average line crossovers and their relationship to the center line.

Integrating Bullish Crossovers

To be able to establish how to integrate a bullish MACD crossover and a bullish stochastic crossover into a trend-confirmation strategy, the word “bullish” needs to be explained. In the simplest of terms, bullish refers to a strong signal for continuously rising prices. A bullish signal is what happens when a faster-moving average crosses up over a slower moving average, creating market momentum and suggesting further price increases.

  • In the case of a bullish MACD, this will occur when the histogram value is above the equilibrium line, and also when the MACD line is of greater value than the nine-day EMA, also called the “MACD signal line.”
  • The stochastic’s bullish divergence occurs when %K value passes the %D, confirming a likely price turnaround.

Crossovers in Action: Genesee & Wyoming Inc.

Below is an example of how and when to use a stochastic and MACD double-cross.

Note the green lines showing when these two indicators moved in sync and the near-perfect cross shown at the right-hand side of the chart.

You may notice a couple of instances when the MACD and the stochastics are close to crossing simultaneously: January 2008, mid-March and mid-April, for example. It even looks like they did cross at the same time on a chart of this size, but when you take a closer look, you’ll find they did not actually cross within two days of each other, which was the criterion for setting up this scan. You may want to change the criteria so you include crosses that occur within a wider time frame so you can capture moves like the ones shown below.

Changing the settings parameters can help produce a prolonged trendline, which helps a trader avoid a whipsaw. This is accomplished by using higher values in the interval/time-period settings. This is commonly referred to as “smoothing things out.” Active traders, of course, use much shorter timeframes in their indicator settings and would reference a five-day chart instead of one with months or years of price history.

The Strategy

First, look for the bullish crossovers to occur within two days of each other. When applying the stochastic and MACD double-cross strategy, ideally, the crossover occurs below the 50-line on the stochastic to catch a longer price move. And preferably, you want the histogram value to already be or move higher than zero within two days of placing your trade.

Also note the MACD must cross slightly after the stochastic, as the alternative could create a false indication of the price trend or place you in a sideways trend.

Finally, it is safer to trade stocks trading above their 200-day moving averages, but it is not an absolute necessity.

Special Considerations

The advantage of this strategy is it gives traders an opportunity to hold out for a better entry point on up-trending stock or to be surer any downtrend is truly reversing itself when bottom-fishing for long-term holds. This strategy can be turned into a scan where charting software permits.

With every advantage of any strategy presents, there is always a disadvantage. Because the stock generally takes a longer time to line up in the best buying position, the actual trading of the stock occurs less frequently, so you may need a larger basket of stocks to watch.

The stochastic and MACD double-cross allows the trader to change the intervals, finding optimal and consistent entry points. This way it can be adjusted for the needs of both active traders and investors. Experiment with both indicator intervals and you will see how the crossovers will line up differently, then choose the number of days that work best for your trading style. You may also want to add a relative strength index (RSI) indicator into the mix, just for fun.

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