Sunday, April 6, 2008

MACD and Slow Stochastic Combination

In order to combine the right indicators that can aid each other to make better decision is not easy. As some indicators can bring contradicting signals to each other because of their differences and used. So this time I am going to discuss about another good combination of indicators which is very effective in daily trading especially using 4 hourly and daily time frames.

MACD or Moving Average Convergence/Divergence is a lagging indicator that still very much in used today by traders. Despite of its lagging effect the application is solid when it is moving on its way. For example when it moves upwards it will not easily stop until it is reaching the point of interception. And further more to twist direction it will at least take sometimes generally two cycles of the stochastic. This solid movement provides the traders the hint of the overall direction of the market movement.

Even though slow stochastic is the most recent movement of the chart but it requires a solid foundation to support its movement. Without the solid foundation stochastic usually make temporary short-term fluctuation without clear direction. Therefore by using a lagging indicator like MACD the movement of slow stochastic can be assured and solid.

Let's take a look how these two indicators can work hand in hand to show a clear direction of movement. See the chart below.

Notice on the chart above when stochastic is moving along on the foundation of MACD it will keep moving up. Because of stochastic is moving faster than MACD it will make the first downturn but only for temporary and later move up again follow the MACD. Until then when MACD is making a twist downwards direction, following by stochastic the movement will be strong.

In this example we can see that Stochastic is unable to move long enough perfectly without the foundation of MACD. It will only cause short-term correction. Until MACD is moving parallel with stochastic then it will be perfect movement. This combination of technical indicators is best use on 4 hourly and daily time frames to increase its accuracy.

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