Once we have learned which indicators are for trends, overbought/oversold, tops and bottoms, etc; we can then create our own trading strategy. A simple trading strategy can be created with a slow MACD indicator and a faster moving Stochastics indicator. The MACD should tell us the direction of the trend; therefore we should be looking for entries in the direction of the trend. The stochastics should tell us when the price has finished retracing and is heading back in the direction of the main trend, indicated by the MACD.
On the chart above, courtesy of the Forex Broker ActivTrades http://www.activtrades.co.uk/, we can see that during the last few candles the MACD has shown that the trend is bearish. Notice that the MACD has a slow configuration of 19, 36, 9. The Stochastics has been configured to 3, 3, 3 to make it more sensitive to price changes. Since the MACD is pointing down, it indicates that the trend is bearish. Therefore, if the Stochastics goes to overbought levels, above 80, and then comes back down, that would be a signal for a short entry. It is generally more reliable when the MACD is pointing down, like in this case. The opposite applies to long entries.
Alexander Londono – Analyst Contributor at ActivTrades.
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