Being an investor you must know how to predict the change of course in price patterns of stock effectively. For this you require a best-suited technical indicator. In simple words, technical indicator is sequence of data points that are obtained by implementing certain formulae to the previous price data of any stock or security. Here the price data implies any grouping of open, high, low or close over certain time period. You must know that some of the indicators just use price of the stocks, while others use volume of the stocks over a period. However, there are few indicators those use both price and volume simultaneously. The data points are the output produced by those formulae, while the data points are the input of the formula used. With the help of these data points the technical analysts understand the market trend and the future expectation of the price of stock. The traders believe that just one indicator cannot be that magical as what magic can be created by the combination of the two technical indicators. Thus, in this article we will throw some light on implementation of two technical indicators together. Bullish MACD crossover along with a bullish stochastic crossover is the best combination for traders to implement and use this as entry point to trade.
Combining MACD with Stochastic
The technical analysts searched for the two most compatible technical indicators that can perform well in technical analysis of the stocks and found Moving Average Convergence Divergence and Stochastic Oscillator. The analysts believe that this combination is complete package as the comparison of closing price to its price range over certain period is done by stochastic as well as the formation of MACD with each other. If used to its fullest potential this active amalgamation is extremely effectual.
How does Stochastic Works
Stochastic oscillator is mainly comprised of two main components: the %K and the %D. Here, the %K represents the number of time periods and is the main line and on the other hand, %D is the moving average of the %K.
To know how the stochastic indicator will react in different situations is very crucial. Hence, few conditions are stated below:
- When the situation arises, in which the %K drops below 20 and common triggers happen, then the stock is said to be oversold and it is strong buying signal.
- In the situation, when the %K peaks just below 100 and heads downwards then the stock is sold before the value dropping below 80.
- When the %K value rises above the %D in that case stock is said to be overbought and it is strong buying signal. The values must lie under 80.
How does MACD Works
MACD is helpful in the recognition of price trend and direction. This technical indicator shows the difference between the two moving average of different lengths i.e., fast and slow moving average. Technical analysts believe that this indicator is best used in wide swing trading. This adaptable trading tool can expose Price momentum. Although MACD is a strong technical tool, which can be implemented alone to gauge the market but technical analysts use this in combination with other tool. Traders and technical forecasters can take advantage of MACD by using it with other tools.
The stochastic and MACD double cross permits to modify the time, helps in finding best and reliable entry points. Thus, it can be implemented for both the requirement of active traders and investors.
Advantages and Disadvantages of the Strategy
The advantages gets strengthen by the combination of the two strategies and the disadvantage is reduced. The advantage of using the two indicators together is that they only focus on the strongest signals of trading. This advantage of holding just the strongest signals is itself a disadvantage for the traders. If it will hold out only the very strongest signals then in that case there will be fewer signals to trade. Traders will have to look for wider variety of markets to generate regular and less strong trading signals.
Conclusion
MACD and Stochastic, both can be implemented alone. However, technical analysts believe MACD is more reliable and dependable option as compared to the stochastic, when used as a solo trading indicator. The pairing of stochastic and MACD is ideal, which can offer an improved and more efficient trading skill. MACD is the second most preferred technical tool by the analysts, after RSI.
