Please note that this is not another method to time your trades. You don’t have to decide, “Moving Averages or Oscillators?”. I use both in my trade planning. Moving averages setup my trades. I then use Oscillators to fine tune the opportunity to pull the trigger.
Just like the use of moving averages to differentiate price and market action, in similar fashion, I use oscillators to do the same. I use MACD and Stochastics to do so. However, I use custom settings so they tell me different readings. I found that the default settings were useful if I used one or the other, but not both. Therefore, I changed the settings so they were measuring the different forces of market and price action.
I speed up Stochastics (Fig 1 set at 8.3,5) and I slow down MACD (Fig 2 set at 21, 55, 8). Note that both technical indicators have settings based on the Fibonacci sequence. Because stochs is fast, it changes direction often. This shows me over bought and over sold conditions for price action. MACD, having been slowed down, crosses less frequently. It represents over bought and over sold conditions for market action. It is my goal to time the entry of my trades by lining them up before I pull the trigger.
A trader should let MACD take the lead. Never bet against the MACD. It represents what the market is doing at the moment. Just like the moving averages strategy, your goal is to enter your trades after MACD has crossed and when Stochs then crosses in the same direction. If MACD crosses up, buy the currency pair the next time Stochs crosses up. The opposite is true if the MACD is pointing down.
You will inevitably miss “tops” and “bottoms” because MACD is slow, but that is ok. You are not trying to make every pip possible. You are trying to improve your patience to wait for proper trade setups and develop the discipline to enter your trades based on your analysis, not gut feeling. You won’t get ALL the pips, but you will get MOST. However, you may stay in trades a lot longer and therefore make more pips if you are exiting your trades prematurely.
What you may find is that you enter many of the same trades you are losing on now, but with this strategy you are winning more often. Why? It’s a matter of timing. You are waiting for the market to change direction, but instead of entering right away and suffering through the first pull back, you are entering on that pull back. Isn’t that cool? Your analysis is the same, but you are now entering your winning trades where you used to exit your losing trades. Hey… timing is everything in forex!
In figure 3 you will see examples of long and short trade opportunities using these two oscillators. Notice how the trades were setup with MACD first, then the actual trades were entered on the stochs crosses after. The two indicators were in alignment.
The first “X” indicates a MACD cross downward. This shows you that the market is over bought and that the market is likely to fall. Your trade plan is now to look for opportunities to short the market. To time your trades properly, you would sell when price action is bearish as well. These are indicated by the stochastic crosses downward; they are circled. There were three stochs crosses after the MACD cross. Bearishness has technically ended when the MACD crossed back up. Stop selling.
The second “X” is an indication that the market wants to rise. It should be your trade plan to look for opportunities to buy when the market is over sold. Since MACD is now rising back toward the waterline, you should go long when the stochastics is also rising. These bullish trade entries are circled. The bullishness is technically over when the MACD crossed back down. Stop buying.
The trades were based on “Extreme MACD Crosses” that indicated that the market was drastically over bought or sold. The trade logic is to follow MACD back to the waterline… and if you are lucky, beyond it. All trades were setup by the MACD, but entered when the stochasics aligned itself with the new MACD cross.
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