Stochastic MACD Strategy – Double confirmation trading

It might seem to be an unlikely combination of using two oscillators for a trading strategy and could bring to question on the redundancy of one of the two oscillators in question in the Stochastic MACD strategy. However, despite being contrarian, trading with both the Stochastic and MACD oscillators can prove to offer traders better edge when it comes to short term trading strategies. The Stochastic and MACD trading strategy is very simple that even absolute beginners to forex trading will find it comfortable to trade with. However, the catch is in waiting for the right trading conditions before pulling the trigger.

Read this article to learn more on how to use the Stochastic and the MACD oscillators to build a relatively simple trading strategy.

Stochastic MACD Strategy

Traders should first understand the difference between these two oscillators.

The Stochastic oscillator is basically a momentum indicator, where it measures the high and low in relation to the look back period and signals turning points in the market.

The MACD oscillator on the other hand is merely a histogram and the MACD and the Signal line representation of the moving averages. The MACD visually represents the convergence and divergence of the moving averages. When the MACD starts to rise, it typically conveys that the moving averages are diverging (moving in opposite directions). This is a signal for a strong trending market. Likewise, when the MACD starts to converge, it indicates slowing of momentum or even trend for that matter.

For the Stochastic MACD strategy, the charts simply involve applying both indicators with the default settings. For the purpose of illustration, the charts shown in this article make use of the default MACD setting of 12, 26, 9 and the Stochastic setting of 5, 3, 3 (High/Low, Exponential).

Stochastic MACD Strategy – Chart Setup

Buy Signal

Look for Stochastic as the first indicator to signal an up move. This would mean that the Stochastic move up from below 20, the oversold levels

After the Stochastic signals a potential long set up, wait for MACD to cross above the 0-line. It can be anywhere from 10 and up to 20 bars since the Stochastic oscillator gives the signal
When the MACD confirms by crossing above the 0-line, go long on the closing price
Set the stop loss to the most recent low before the long signal was triggered

Take profits when Stochastic crosses from the overbought level of above 80 and the MACD crosses below the 0-line or is below the 0-line already

Stochastic MACD Strategy – Bullish Trade Setup

The above chart shows the long signal with annotations based on the Long set up rules.

Sell Signal

Look for Stochastic as the first indicator to signal a down move, indicated by Stochastic crossing below the 80 level from the overbought levels
After the Stochastic signal a potential sell set up, wait for MACD to cross below the 0-line

When the MACD crosses below 0-line enter short on closing price with stops placed at the nearest high prior to the short set up signal
Take profits when Stochastic moves to oversold levels and MACD crosses above the 0-line

Stochastic MACD Strategy – Bearish Setup

The above chart illustrates the short set up example with notes.

Stochastic MACD Strategy – Key Takeaway

This trading strategy is simple and easy to implement. However the toughest part comes from having to wait for the right set ups. There are instances when the MACD signals ahead of the Stochastic and such scenarios are likely to push the trader to take up positions. With due chart time and practicing this trading strategy, the Stochastic MACD Strategy set up can be familiarized with and can be a robust trading strategy. Considering that the Stochastic and the MACD oscillators are commonly found in almost any trading platform, this strategy can be applied to any trading platform.