MACD Rollercoaster Forex Strategy With Stochastic Indicator

This strategy combines the popular MACD trend-following strategy and classic Stochastic oscillator rebound strategy.

It is known that the Stochastic indicator works badly in trending markets.

In other words, trend distorts the Stochastic indicator readings and produces false signals.

In its turn, the MACD indicator gives false signals during stagnating, lateral movements of the market.

The combination of the two indicators aims to take the best qualities of each.

Let’s getting started...

SHORT DESCRIPTION OF STOCHASTIC

There are two components of the Stochastic oscillator:

The %K and the %D lines.

The %K called Stochastic line is the main line and represents Stochastic oscillation of the price for the last N bars.

%D or the Signal line represents of the %K line and shows and trend of the indicator.

As the classic oscillator, Stochastic ranges between 100 and 0. Ground rules for the Stochastic Oscillator:

Stochastic line %K drops below 20 – asset is oversold; %K line rises above 80 – asset is overbought

%K line is higher than %D line – asset is in uptrend; Stochastic line is lower than %D line – downtrend

MACD histogram positioned above and below the 0 level

MACD histogram positioned above 0 is a bullish trend

MACD histogram positioned below 0 is a bearish trend

RULES FOR THE STRATEGY

The strategy consists of two logical steps:

First we determine trend direction with the help of MACD Indicator.

Second we determine the entry point within MACD trend direction with the help of the Stochastic Oscillator indicator.

SETUP

- Any trading instrument is suitable

- To avoid the impact of market noise we recommend to use time frames starting from the 15 min chart and above

- Add the Stochastic Oscillator (we recommend following settings Stochastic (9,5,3);

- Add the MACD indicator (we recommend following settings MACD (24,200,14); Buy signal:

- MACD histogram positioned above the 0 level

- Stochastic line %K is greater %D and crossing the 20 level from bottom-up

Sell signal:

- MACD histogram positioned below the 0 level

- Stochastic line %K is lower than %D crossing the 80 level from above-down

EXIT RULES

The strategy allows several exit rules.

In addition to the stop loss and take profit, the Stochastic oscillator will be used to determine an end of the trading impulse.

STOP LOSS

There are several rules to evaluate the Stop Loss, which underlay different risk levels.

Usually, Stop-Loss set to the support levels and pivot points. These rules are listed for the Buy signal, for the Sell signal rules should be vice versa.

- Closest lower Pivot Point

- Minimum of the last bar (Suitable for the high time frames, 4h, 1D, 1W)

- Minimum of the current day

- Current Price – k* ATR ( show average price motion; k between 2 and 5)

TAKE PROFIT

Take Profit is the desired level of profit and must correlate with Stop Loss level.

One of the most important indexes of the strategy is relation SL/TP.

This relation is called risk/reward level of the strategy (rules are for the Buy signal):

- Last Pick (Visual Pick of the price for the reasonable period)

- Closest upper Pivot Point

- Maximum of the last bar (suitable for the high time frames, 4h, 1D, 1W)

- Current price + k* (Standard Deviation indicator stands for an average price motion; k between 0.5 and 1)

- Current price + k*ATR (ATR – average true range, calculated on a different principal than Standard Deviation; k between 0.5 and 2)

EARLY EXIT RULES

In this strategy, the Stochastic Oscillator reflects intraday price peaks and reversals on which trader enters the market, reverse signals of this indicator could also serve as exit signals.

Nevertheless, the MACD Indicator which shows trend direction should be also considered.

Rules for closing the Buy trade:

- Stochastic line %K crossed 20 level from above-down

- Line %K crossed signal line %D from above-down

- Line %K reached 80 level and crossed it from above-down

- MACD indicator loses momentum or crosses zero level from above-down (MACD histogram rapidly approaching zero. Mainly determined visually)

EXAMPLES

This chart demonstrates several buy signals in a row, all closed by the Early exit rules. Note that decreasing MACD accompanies calming market. The chart demonstrates sell trades during a downtrend.

Stop Loss level is 60 pips, according to the weekly maximum and ATR level; Take Profit is 30 pips.

All trades were closed by the early exit rules.

PROS

Straightforward and profitable strategy, works best in trending markets.

CONS

Strategy gives false signals during stagnating market periods.