strategy: 5 minutes momo trade

This trade strategy was introduced by investopedia in their free ebook. This is presented in their free ebook "High probability Trading Setup". This is originally developed for inpatient people (like me) for trading the 5 minutes chart. I just loved the simplicity and the fact that it does works really well. Let’s get more into it below.

As the book written, this is for inpatient people to trade the 5 minutes chart. The setup couldn't get simpler. What we need on our chart is

• 5 minute chart on any currency (prefer high volatility pairs)
• 20 EMA on the chart
• MACD with default setting

These are the original context of the strategy

condition to go long

when the price cross the 20EMA from below to above

confirmation by MACD is above the zero line

Go long on 10 pips above EMA line

condition to go short

when the price cross the 20EMA from above to below

confirmation by MACD is below the zero line.

Go short on 10 pips below EMA line

exit

exit half of your position when target reach.

trail the stops for the remaining.

stop lost

place stop lost at 20 pips below EMA line

place stop lost at recent swing low / high

With proper money management and risk reward ratio, this is quite rewarding trade strategy even without any indicator. The MACD indicator was there to filter out the bad trade so we can avoid false breakout.

However I have made some twist to this system, and here is my version

• 5 minutes or longer time frame chart
• 21 EMA (slightly longer)
• MACD with default setting.

stop lost

stop lost placed at the most recent swing low / high

exit

same as original rule.

Trail the stops of remaining until MACD line starts coming down. Why am I using 21 EMA? Because it is slightly longer, so breakout occur a bit later (more confirmation). Plus 21 is a number in fibs sequence, and also the EMA recommended by fxKnight.

The wonderful thing about this system is that it not only works with 5 minutes chart, but i have tried it with 1 hour chart and it works wonders.

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Strategy: 250EMA by fx-tiger

This strategy is invented by a forum member name tiger-fx. It is from a Chinese community forum. According to him, he target to double the capital each year, with only making few trades within a year. Let me explain it more details here.

According to tiger-fx, we no need any indicators at all. “No MACD, no stochastic, we need nothing,” according to him. All we need is inserting one 250EMA on our chart. Apparently this is his favorite EMA too. “Go long when EMA pointing up, go long; when EMA pointing down, go short,” according to him. The time frame for this trade is using 4Hour chart.

Setup is fairly simple, we need only 2 thing:

• Open 4-hour chart.
• Insert one 250EMA

Entry and exit are fairly simple too:

Enter long when EMA pointing up, Exit when it is pointing down

vice versa for exit

 Go Short when 250EMA pointing down

Why does it work?

Yes it does works. The 250EMA are actually long term moving average, but with weight putting on last candle. 250EMA on 4 hour chart basically calculate the data from the past 1000 hours (250 times 4 hours). Usually long term move will be more significant over long period of time.

Go long when 250EMA pointing up on 4Hour chart

Why it doesn’t work

Yes, it doesn’t work too! Many of the time, the 250EMA will be a flat line, where the price will move above, and far above it; or far below. Those move are big gain to be missed out.

Sometimes 250EMA just move sideway, while the price going highly above and below it

So here you go the pro and cons of the system. It does works, but not all the time. Like many other strategy there are pro and cons. There is no perfect system. Feel free to take this as basic and customize to become one of your systems. 

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tips: Real MACD in MT4 in 3 minutes.

In my last post, I have discussed about MACD in Metatrader. Though it may looks different, the default MACD in metatrader can be quite useful too. However if you wish to get the usual MACD in your Metatrader, there is few ways: 1. Write a script on your own, which take couple of hours. 2. Download a customized MACD, which take around 15 minutes. Now, exclusive on sam-fx.blogspot.com, I going to show you how to make your own MACD within 3 minutes.

The photo below shows the normal MACD (above) and the default MACD (below). In this case the normal MACD I downloaded from the internet. 

Lets examine what is the component in “normal” MACD.

• MACD line – 12EMA minus 26EMA
• Signa line – 9 period EMA of MACD line
• MACD histogram – difference between MACD and Signal line

And this is MT4 default MACD

• MACD line – replaced by histogram
• Signal line – 9 period EMA of MACD

Now to build our “normal” MACD, we will do it one component a time. Firstly is the signal line. The signal line is the same, so we will leave it as it. 

Signal line

Firstly, go to insert, indicator, and select MACD. Leave the value to default. But we are going to remove the histogram. On the color of the histogram, select “none”. Your chart should look like this now.

Insert MACD

Select "None" here

Your Chart should looks like above

MACD Line

Now the second part is the MACD line. In MT4, the default line is signal line (9EMA of MACD). Now, how to turn this into MACD line? Yes you are right! We leave the setting to 1EMA, and it’s the MACD itself.

So go to your navigator window, and under “indicators”, drag MACD into your indicator windows. Windows should prompt for input. Now the default setting should be change to 12, 26, and 1. Same as above, we going to remove the histogram. So on the color of the histogram, select “none”. Your graph should looks like this now.

Drag  another MACD inside your indicator window

Change the SMA to 1

Change to any color you like

Your chart should looks like this now.

Histogram

Now the last part, histogram. I notice another indicator, the OsMA is MACD minus signal line. So we going to use it. On the navigator pane, drag the OsMA (under “custom indicators”) into your indicator windows. You should leave the setting as default (12,26, 9). 

 Drag the OsMA indicator in

Leave the default setting

Your chart should looks like this.

 

And there you go, you have your real MACD indicator, and all under 3 minutes of work!

Your graph should looks like this. I have put in the real MACD indicator for comparison.

Comparison of 2 MACD. They are similar :)

Now one final important note, because its 3 indicators in 1 window, the scale tends to float. I would set the minimum and maximum scale for them. You can do it under the property of each indicator.

 Remember to set the scale

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basic: ADX indicator

ADX stands for Average Directional Index. In short, this indicator shows the strength of the trend. ADX is developed by J. Welles Wilder to determine the strength of the trend. Here I would share more about ADX.

 This is how ADX Indicator looks like.

ADX consist of 3 lines: ADX line, +DI and –DI lines. ADX signal will oscillate between 0 and 100. The main ADX line shows the strength of the trend. It does not show is it uptrend or downtrend. The higher the reading is, the stronger the trend. A general rules-of-thumb says ADX reading above 20 shows trending market, where reading below 20 shows ranging market. ADX above 40 shows a very strong trend. The ADX default period is 14. This means it is calculated with 14 previous bars in the chart. However the value can be lower or increase based on personal preference.

The 2 lines in ADX is +DI and –DI. They represent the strength of bulls and bears. They are the positive/negative directional indicators. When +DI is above –DI, the bull is on the upper hand. When +DI is rising, the uptrend is getting stronger. When –DI is above, the bears are stronger. When –DI is rising, this shows the downtrend is gaining strength. The +DI and –DI crossover can be seen as one side is overpowering the other side.

There are many use of ADX. The first is to determine the strength of the trend. Another way of using it is to use the DI line crossover to determine the turn of the trend. And ADX can be referred to determine if the market is ranging or trending; and in that way helping us to decide to refer to momentum indicator or oscillator indicator. Trend line can be drawn on ADX peak to show increasing or decreasing of overall momentum.

Notice in the picture above, when trend is getting stronger, ADX is rising, no matter its uptrend or downtrend

The ADX formula is beyond discussion of this article. A good source to find the ADX formula is on this page: http://forex-indicators.net/adx

In short, here are some guidelines on using the ADX

• When the ADX is over 20, the trend is strong
• When the ADX is over 40, the trend is extreme
• When the ADX is below 20, the market is ranging
• When the +DI cross above –DI, the bulls are stronger. Uptrend is taking place
• When the +DI is rising, the uptrend getting stronger
• When the +DI is moving down, the uptrend getting weaker
• When the –DI cross above the +DI, the bear are stronger. Downtrend is taking place
• When the –DI is rising, the downtrend is getting stronger
• When the –DI is moving down, the downtrend is getting weaker
• Trend line drawn on the peak of ADX can indicate weakening of overall trend.
• Trend line drawn on the lows of ADX can indicate increasing strength of overall trend

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tips: Market hours and activity.

In my last posting about market hour, I talk about market hours. Its clear that not all the time the market is active. The best hours should fall when the market is overlapped. We could see more activity during those times. Here I would share another piece of information that I got. Among the major pairs, some are more active compare to other in different sessions.

The figure above shows the currency pairs during Asia (Toyko) and London Session. On Asia session, seems like the most active pair is USD/JPY, and seconds by EUR/USD. The rest of the currencies don’t seem to have much activity. On the London session, the most traded pairs are the EUR/USD, and GBP/USD. It seems that Tokyo session is quieter than London session.

There you go, another piece of information. Use this to wisely to improve your winning possibility.

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A proverb

"Expecting the market to move your way because your indicators say so;
is like expecting a lion not to eat you because you are a good person"

What a nice proverb. Well I twisted it a bit. Its originally in other meaning. However I found it is nice so i twisted it and posted it here. We must keep in mind that the market is a living thing, and it will move to where ever it likes. Technical indicators or fundamental factors, they might be right but market will choose to goes another way and eat our money. (See first few chapters on "trading your way to financial freedom" by Dr.Van Tharp). What we can do is have good Money Management and Risk control.
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Basic: Divergence

When I first learn Forex, I saw this word everywhere. Divergence and convergence in almost every article I read. But I not pay much attention to it. Later on I learn that regular-divergence and hidden-divergence can be important part on our trading strategy. Here I will share what I know about divergence.

Indicators are derives from price (and sometimes volume). They usually follow the direction of the price. Divergence is the phenomena where price is making a trend, but the indicators go opposite direction of the trend. The indicator signal “diverge” from the price, thus come the name. There are 2 types of divergence, regular divergence and hidden divergence. Divergence can spotted on any indicators, some fine examples are MACD, RSI, stochastic, etc.

Regular divergence usually shows the trend might be weakening and reversal is near. Hidden divergence usually shows that there is temporary retrace happening, and the trend might continue moving back to the main direction.

Regular bearish divergence

When price moving on an uptrend, the price is making a series of higher high. On the same time, the indicator will be making a series of lower high. This is regular bearish divergence. This show the bulls are weakening and the bears might take over soon in price reversal.

Regular bullish divergence

In downtrend, the price is making series of lower low. But the indicator will be making a series of higher low. This is sign of regular bullish divergence. This usually indicates that the bears are weakening, and the bull will starts to take over soon on price reversal.

Hidden bullish divergence

On an uptrend, the price is making a series of higher lows, however lower lows are shown in indicator. This is sign of hidden bullish divergence. This means that the dip are just a pause and price will continue to move in the same way.

Hidden bearish divergence

On a downtrend, the price will be making a series of lower high, however the indicators will show higher high. This is hidden bearish divergence. This shows that the recent high is just a pause, and the price will continue moving the same direction.

Lets loo at some examples:

Regular bearish divergence. Price making higher high but indicator shows lower high. 
Notice soon after bearish divergence appear, the reversal happens.

Regular bullish divergence. Price making lower low, indicator making higher low. 
Notice that the reversal happens soon after the divergence.

Another classic bullish divergence. Price making lower low, indicator making higher low.

A hidden bearish divergence. Price moving down making lower high. Indicator making higher high.
Price continues to move in the same direction after the hidden divergence.

A hidden bullish divergence. Price moving up making higher low. Indicator showing lower low.
Price continue moving in the same direction after the divergence.

Although divergence is not a 100% confirmation on reversal (or continuation), but it is a good indicator to watch out for. With combination on candle stick pattern and other indicators, this can create a very profitable trade. 

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Trades: 22 Jul 2010, GBP/USD

Seems like I have repeated my mistake again. 22 July 2010, mid day, GBP/USD have rise a lot that time. And I am so caught up testing my technical analysis I never realize I am entering wrong trade.

What I have missed out is the news. There are important news out during the day. On earlier the day, The EU doing good and pulling GU up.

• French Flash Manufacturing PMI doing not so good compare to forecast,
• French Flash Service doing better than forecast,
• German Flash Manufacturing PMI doing way better than forecast,
• German Flash Service PMI also doing better than forecast.
• Euro Flash Manufacturing PMI and Service PMI both also doing better than forecast.

Later after the announcements, 2 more came in,

• U.K. retail sales m/m doing better than forecast,
• EUR industrial new orders m/m also doing better than forecast

Overall this gives a very good impression on overall Europe economy. If I have notice it I would have few profitable trades in the day.

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Trades: 21 July 2010: GBP/USD spikes

Yesterday there are some strange movements on GBP/USD. On exactly 6:56 GMT, GU spikes down tremendously. After that it spikes up a lot, then move down again. All that happens in a short time.

As you could see in the chart, there is one big long candle (including the wig) at that hour. I thought its some gradual movement, but zoom in to minute chart, review that it all happens within 2 minutes.

Yes viewing on the minute chart, it’s clear that its all happens within 2 minutes. A massive 120 pips within 2 minutes! I eager to find out what’s happening, but my efforts are in vain. After hours of research, there is only one website that explains this. (http://community.nasdaq.com/news/2010-07/forex-gbpusd-spikes-down-120-pips-to-15185.aspx?storyid=29319)

According to the site, “Pound's recovery from 1.5150 low on Tuesday has been cut abruptly at 1.5320, and the pair has spiked down about 120 pips in a matter of minutes, allegedly, due to a large sell order by a Dutch bank, to print a fresh session low at 1.5185.”. Up to now I have no idea what is happening, but this clearly shows me the power of ‘big money’.

Anyone knows what’s happening feel free to post your comments or mail me. Thanks.

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basic: Relative Strength Index (RSI)

Relative Strength Index (RSI), another momentum indicator which is one of the most indicators for traders. RSI developed by J. Welles Wilder at 1978. It measures the relative strength within the price low and high over a period of time. I often used this together with other indicator such as stochastic for double confirmation. When I first learn Forex I thought RSI just a matter of observing the 30 and 70 levels only, however there are more to it when I learn it deeper. Here I would share more about RSI.

RSI indicator move around between level 0 and 100. It is calculated by the average gain and loss of a price. It is price based indicator, as opposed t o Money Flow Index (MFI) which is volume based indicator. The formula for RSI is beyond the discussion here. There are many different formulas out there, but this one i found at stockcharts.com is the most accurate one. (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_index_rsi)

n

This is how RSI indicator looks like

 

Welles recommends the period to be 14, but it can be changed based on traders preference. Besides 14, the most popular period being used is 9 and 25. Lower the period will result in more oscillation, but also increase chances of false signal.


Overbought / Oversold
RSI oscillate between 0 and 100. When the level is over 70, it is considered overbought. When the level is below 30, it is consider oversold.

Traders often take it as short signal when RSI is over 70 and long signal when RSI is below 30. This is not always right things to do because in strong trend, RSI will stay in the oversold/overbought territory for some time. Usually check with candlestick patterns and confirmations with other indicators are needed to make the trade. When RSI move out from overbought/oversold territory, it is good signal to enter.


Divergence
Divergence is another way to use RSI. When price makes a higher high but RSI fail to make a higher high, a reversal is near. When price making a lower low but RSI makes a higher low, a reversal is possible too.

Note that in strong trend, divergences are misleading. In my opinion, RSI shows more misleading divergence compared to stochastic.

The price is making a new low, but the RSI is making higher low.

Another view of divergence

 

Centre line crossover
The level 50 line is good area to determine bullish and bearish trend. When RSI fall below 50, the bear is stronger, when RSI rise above 50, the bull is stronger. On a moving trend, RSI crosses the 50 level is a confirmation of trend movement.

Bearish center line cross over

Bearish center line cross over

 

RSI trend line
Another way to use RSI is drawing trend line at RSI indicator itself. Similar to trend line trading, but the line is drawn on the RSI signal line. This is useful because reversal on the trend line often seen earlier in RSI then at the price chart.

RSI trend line. Not always easily visible

Failure swings
Failure swing is not related to price chart. A bullish failure swing is when RSI dip below 30, bounce up, then down again, and when the line cross the previous height, this is failure swing. The opposite happens for bearish failure swing. Failure swing is a good signal on possible reversal of the trend.

 

Unlike the stochastic, signals in RSI are rare and harder to spot. But once they appear, it can be very significant. Use it wisely and it may bring you many profitable trade.

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Wish Board

This is done in beginning of each journey, and I wish to share mine with you all. Wish board is a list of something we will like to have or achieve, when we being successful. As BK describe, it’s best that we have pictures, instead of names of item. BK also mention that we should put this one some place we could look at each day. Below is mine

Yeap. This is my wish board. The item inside is not much, as I wanted to be realistic. I started to have one at March, and make some changes on June. The list of my wish items are..

• A villa to live in, for me and my gf (well, that time would be my wife).
• A BMW E90 M3, one of my dream car, how nice if I could drive it everyday.
• Giving more donations to greenpeace.
• Giving more donations to WWF

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basic: Bollinger Band

Bollinger bands, a nice indicator developed by Mr. John Bollinger in the 80s. This is among the most used indicators in stock market and also in Forex market. It is one of the best indicators to measure market volatility and trend. Although I have not much experience in Bollinger band, I would like to write about it here, since I just study some details lately.

Bollinger band is series of 3 lines. The middle of the band is actually simple moving average. Mr. Bollinger recommend that using 20 as the period for the SMA. The upper and lower line is actually standard diviations from the SMA. Around 80% of the time the price will move around within the upper and lower band (with deviation of 2), as if a ball bouncing within the 2 wall.

 Photo above is bollinger band, with deviation of 20.

Market volatility

The Bollinger band gives picture of market volatility at a glance. When the 2 bands are future from each other, the market is more volatile. When the 2 band are getting closer to each other, the market tends to be less volatile.

Overbought / oversold (Bollinger band reversal)

When price reach the upper band, it is said being overbought; and when price reach the lower band, it is said being oversold. Most of the time price tends to bounce within the 2 bands.

Many traders use this as buy/sell signal: going long when price touch or penetrate lower band; going short when price touch the upper band. Some might even doing very well with this method, as 75% of the time the market is ranging. The price tends to move between the 2 bands when market is ranging.

However this would be a bad method at trending period. As Mr. John Bollinger points out, many times the price will "Rides the band". ("tags of the bands are just that - tags, not signals. A tag of the upper Bollinger band is not in and of itself a sell signal. A tag of

the lower Bollinger band is not in and of itself a buy signal". Price often can and does "walk the band")

So to use the "bouncing" method, confirmations from other indicator are necessary. Usually combination with another momentum indicator (e.g. RSI, stochastic) makes a good confirmation.

This works best in ranging market. The Bollinger band tends to work as mini supports and resistance area for the price.

 Notice on the chart above, the price tends to bounce between the 2 band before breakout

Breakout (Bollinger band squeeze )

When the Bollinger band contract or squeezed, a breakout often occur after. This happens when market went through low volatility period when the bulls and bears are competing, and when 1 side takes over, the move tends to be big.

Usually when price starts to break above the band, it will continue it move upward and vice versa for lower breakout.

A breakout occur after bollinger squeeze (red area).

Another breakout and continuation occur (green area) after Bollinger Squeeze (red area)

Strong trend (Bollinger band continuation)

On strong trend, the price most often wont 'bounce' on the Bollinger band; but continue to move along side the band. It is important to identify is there high possibility for a bounce or continuation.

When price breaks the upper band, if the upper band is pointing upward in the same time, there are high possibility continuation is happening. Price is more likely to continue to move upwards.

When the price breaks the lower band, if the lower band is also pointing downward, there are high possibility continuation is happening. Price is more likely to continue to move down.

Changing the Bollinger Band period

The period (default 20) can be change based on different types of markets. 2 most popular periods is 20 and 14. On less volatile market, lower the period can makes movement easier to identify. A period that is too short will give more false signal. Bollinger band with longer period will appear wider than the shorter period Bollinger band.

Bollinger band with period of 14 (yellow) versus period 20 (purple)

Multiple bands

Multiple sets of Bollinger Band can be used together to give different meaning. There are many trading methods that involve multiple Bollinger Bands.

In example below, 2 sets of Bollinger Band is used, one with 1 as deviation and another is 2 as deviation. The area outside Bollinger band 1 and inside Bollinger band 2 is considered as buy/sell zone.

When price move inside Bollinger band 1 it is good exit signal.

 Using 2 Bollinger Band; when the first breakout occur, confirm with Stochastic and enter the market (green area). When the price close inside Bollinger 1, exit is trigger (red area)

Above is what I have learnt about the Bollinger Band. Please feel free to post in your comments and opinions.

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basic: Stochastic

Stochastic, this is an oscillating indicator (as oppose to trending indicator). This is one of the most popular indicators out there. For me this is my favorite indicator. Many times this amazing indicator has helped me avoid bad trades, and spot a high profit entry. Developed by George C. Lane in the 50s, according to him, this indicator doesn't follow the volume or price, but the momentum of the price. As another article describe, "as a accelerating rocket climbs up, it will loose acceleration, slows down, before it starts falling". Stochastic is best used to show the weakening of momentum and point out the possible reversal signal. Let’s goes deeper into this indicator.

Fast, slow, full stochastic
Stochastic indicators is lines oscillating between 0 and 100 level. The 2 lines labelled as %K and %D. Usually we call the %K as “fast line” and we call the %D “Slow line”.

Stochastic first developed by George C Lane as "Fast Stochastic". On fast stochastic, there are 2 lines, %K and %D. There are 2 inputs for the fast stochastic, first is the period (default is 14); and second is the smoothing of %D line (by default is 3). The %K and %D line is calculated by this formula:

• %K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100
• %D = 3-bar SMA of %K

where a period is given (by default, 14) the lowest low and highest high is within the period.

The %K line will be very choppy on fast stochastic, where George Lane will enter and exit the market based on the %D line. Later on, the Slow Stochastic was developed. 

In slow stochastic, the %K line is smoothed out (by 3 SMA). The 2 parameter for slow stochastic is the period (by default 14) and the smoothing of %D line (by default is 3). The slow stochastic is more reliable because the %K line is smoothed out. What we have in slow stochastic is:

• %K = 3-bar SMA of fast-stochastic-%K
• %D = 3-bar SMA of %K above

What we mostly have now in our software is the Full Stochastic. Full stochastic is basically the same as slow stochastic, but there are 3 input parameter:

• input for period (by default, 14, or 5), 
• smoothing for the %K line (by default, 3), 
• parameter to calculate the %D line (by default, 3). 

The only difference between full stochastic and slow stochastic is the smoothing of %K line can be customized.

(P.S.: Many articles saying that, default stochastic 14,3,3, is stochastic for 14 days. There is a misconception there, the 14 period is determine by candles. If we using daily chart, it will be 14days. If we are using hourly chart, it will be 14 hours)

This is how a stochastic (5,3,3) looks like

Overbought / Oversold.
The lines at stochastic oscillate between level 0 and 100. When it’s above level 80, we consider the market is overbought. When it’s below the level 20, we consider the market is oversold. This does not mean that we will go short when the stochastic shows 80 and above, and vice versa. On some strong trend, the stochastic will stay above 80 (or below 20) for some times and reversal not happening.

How I use this level is, consider them as my ‘non trade area’. When the stochastic shows 80 and above, I would think twice before going long. When the stochastic shows 20 and below, I would think twice before going short. This helps me filter out some of the bad trades.

Notice how in strong trend, the stochastic tends to be choppy and stays below 20 level.

In this example, the stochastic stays above the 80 level for some time

Crossover
The %K line in stochastic is considered as bullish; the %D line is considered bearish. When the %K line cross above the %D line and the stochastic is moving up, the market is turning into bullish market, vice versa for bearish market. However I do not jump into the market straight away when the lines cross. Usually confirmation is needed before we can confirm the reversal is happening.

How I use this is, when the stochastic is at above 80 level, I wait for the %D to cross the %K, then when they crossover and move down into below 80 level, its good sign to go short; vice versa for going long.

Some good place to take a short (red circle) and long (green circle)

Another example showing possible short (red circle) and long (green circle) area

Divergence
Divergence is another good way to use stochastic indicator. In a bullish trend, when price making a new high while stochastic making a lower high, there is good chance of reversal. When the price making a lower low but the stochastic making a higher low; there is chance of reversal.

Price are making new low, but stochastic are making higher low. A divergence.

Price is making new high, stochastic making lower high. A divergence

Time
As BK mention in his webminar, here is another way to use stochastic. The market is like a football game between the bear and the bull. When the %K line is above the %D in stochastic, the bull is holding the ball, and vice versa for the bear.

Watching the stochastic indicator, we can estimate if the bull is stronger or bear is stronger. We estimate this by checking on who is ‘holding the ball’ for longer period of time.

There you go few tips and information about the stochastic indicator. To recap, here is some important part

• When the stochastic is above 80, its ‘no long’ zone, think twice and confirm with other indicators before going long.
• When the stochastic is below 20, its ‘no short’ zone. Think twice and confirm with other indicators before going short.
• When the stochastic is above 80, if the %D is cross above %K; and they are moving out to below 80 level, its good sign to go short
• When the stochastic is below 20, if the %K is cross above %D; and they moving out to above 20 level, it is good sign to go long.
• Divergence is useful way to monitor possible reversal on the price.

Reference:

• Stockcharts.com (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillator)
• Forex-indicators.net (http://forex-indicators.net/stochastic)

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basic: MACD

MacDonald? Oh we are not talking about fast food here. (But thinking about their burger makes me feel hungry while typing this.) Yeah, MacDonald, is called MAC D in short form in my countries, with many advertisement saying/singing "macd"... Too off the topic I guess, in

this post I would like to talk about MACD indicators, developed by Gerald Appel.

MACD stands for Moving Average Convergence Divergence. As the name implies, it show the Convergence and Divergence of 2 moving average. Its one of the most used technical indicators out there. What make MACD so good is that it shows the convergence and divergence in once glance. Beside that the oscillation of MACD signal line can show

convergence and divergence between itself and the price too. 

Let’s looks at what makes out the MACD indicators. The default value would be “12, 26, 9”, which is 12 EMA of the price chart, 26 EMA of the price chart, and 9EMA of the MACD signal. The value 12, 26, 9 can be changed to other value to suits your trading needs. For me I would stick to the default.

In general, MACD indicator will consist of the following:

• ”Fast line”, or sometime called “MACD”; which is difference between 12 EMA and 26 EMA on the price chart
• “Slow line”, or sometimes called “signal line”; which is 9 EMA of the MACD (a.k.a. “fast line”)
• Histogram: the difference between the fast line and slow line.

Reference:

babypips.com (http://www.babypips.com/school/macd.html )

ivestopedia.com (http://www.investopedia.com/terms/m/macd.asp)

incrediblecharts.com (http://www.incrediblecharts.com/indicators/macd.php )

stockcharts.com (http://stockcharts.com/school /doku.php?id=chart_school:technical_indicators:moving_average_conve )

What makes beginner like me confuse is that different article talk about MACD in slightly different form. Some of it with histogram, some of it doesn’t, some with different lines, etc.

To add on to the confusion for beginner like me, the default MACD inside Metatrader is totally difference from the source above. In MetaTrader, the MACD consist of

• “signal line”, which is 9EMA of MACD
• Histogram, which represents the difference between 12 EMA and 26 EMA on the price chart

Yes, I was pretty confused last time. Then I notice that all those difference, they all don’t matter. The default MACD in Metatrader can be as efficient as other variant of MACD out there. Let me describe how to use MACD here without worrying about all the variants. First let’s load up the default MACD in our Metatrader. It looks totally different from the MACD we saw on different articles. With some studies I found out what that histogram represents. Refer to the screen capture below on my chart; I have plotted out 12 EMA and 26 EMA on the price chart.

MT4 MACD, with 12EMA (yellow) and 26 EMA (purple)

Notice that when the 12 EMA (yellow) and 26 EMA (purple) diverge (separate) from each other, the histogram goes longer. Notice when 12 EMA is above 26 EMA, the histogram goes above the 0 line (I have mark it in green box); and when 12 EMA cross below the 26 EMA, the histogram goes below the 0 line. In Metatrader, the histogram replaces the traditional MACD line. Now let’s look at below to see how to spot a “MACD crossover” 

Spot for MACD crossover (red and green circle) on MT4 default  MACD

In traditional MACD graph, the crossover happens when MACD cross the signal line (9 EMA of itself). Since the Metatrader default MACD is replaced with histogram, we will spot the crossover when the line crosses the histogram. On the above screen, I have mark the cross with green and red circles. The Screen below shows the different between traditional MACD graph (bottom indicator window) and Metatrader MACD graph.

Difference between MT4 default MACD and a 'traditional' MACD (below)

I have mark out some of the point when look at a traditional MACD indicator and Metatrader MACD indicator. Here are few points to take note:

• When look for MACD signal line cross, in MT4, we look for the line cross the histogram (red and green circle)
• when look for 12 and 26 EMA cross, in traditional MACD, we look for MACD signal to cross the zero line; in MT4, we look for histogram to cross the zero line. (blue circle)

Spot the crossover in different MACD indicators

Here are some tips on using the MACD indicators:

• when the fast line cross below the slow line, and start diverging, it shows strong bearish sign
• when the fast line cross above the slow line, and start diverging, it shows strong bullish sign
• when MACD is positive and rising it means increasing acceleration of the uptrend 
• when MACD is negative and decreasing it means increasing acceleration of downtrend 
• when MACD moving above positive, in the same time the fast line is above slow line, its bullish signal
• when MACD move below positive, in the same time fast line fall below slow line, its bearish signal
• when MACD and price are diverging, reversal maybe is near (when price reach a new height but MACD show lower height; when price hit a new low but MACD shows a higher low)
• when MACD rises or decrease dramatically, its said that its
• overbought/ oversold, we should be careful of retrace

Trade with above tips, and you will loose money. What I meant is MACD is not to be used alone. Used it with your price pattern and other indicators, and you will have a profitable trade.

There you go, some details on MACD and also MT4 default MACD. Let us start trading with our favourite MACD setting.

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