Stochastic or MACD: How to Get the Most out of Forex 

Published:31 August 2020 Updated:4 January 2024

If you want to make your trading on the foreign exchange market really successful, it is not enough to use only technical and/or fundamental analysis (Forex Trading). Professional traders always use additional tools, which include forex indicators. With the help of forex indicators it is possible not only to predict the market movement and determine trends, but also to find the right time to enter the trade (forex analytics). Some of the most popular, yet simple and effective indicators are MACD and CTohastic. What are their differences, how to set them up and use them? This will be discussed in the article, and for illustrative examples we will use the trading terminal MetaTrader 4 of our trusted partner – broker NPBFX (go online).

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What is Stochastic?

First of all, we should determine how the indicators work. Let’s start with the Stochastic Oscillator. This indicator of the technical analysis defines the percentage ratio of the closing price and the range “maximum – minimum” for any period of time. Figuratively speaking, the Stochastic identifies the beginning of a trend reversal and shows the right moment to enter the market.

How forex oscillator Stochastic is displayed in the form of a percentage scale in the range from 1 to 100, it is located under the chart itself in the trading platform. The indicator uses the balance line and the levels of critical zones 70 and 20. Setting parameters for the indicator is quite a complex process – do not rely thoughtlessly on the “basic settings” from the trading platform.

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Basic recommendations for the Stochastic indicator settings:

  • Important! The more the analysis period – the less the period of calculation of the main line of the indicator should be. The fact is that with the increase of the period Stochastic becomes less sensitive, it begins to be late and may consider price fluctuations as something “unimportant”.
  • Indicator parameters depend on the timeframe and volatility. Example: for popular currencies the “default” parameters will do, i.e. %K – 5, %D – 3 and deceleration – 3. For timeframes up to M30, a stable result will show a period of 9-13.
  • When the Slowing parameter is increased – the lines shift closer to the central zone, i.e. they move upwards. Decreasing this parameter helps the indicator to move longer in critical zones, which makes it almost impossible for a trader to miss a serious reversal.

The screenshot shows the working area when using the Stochastic indicator with an explanation of the main zones and lines.

NPBFH Stochastic working area

 

Example of using the Stochastic indicator

The screenshot below shows the indicator’s work on the example of the popular EUR/USD pair using the standard settings, ie, 5/3/3, time frame H1. Possible market entry points are also depicted on the picture.

NPBFH Stochastic work

As mentioned above, when using the Stochastic indicator, there are two zones to pay attention to – the overbought and oversold zones. It is at the mutual crossing of the line %K and %D in these zones signals are the most serious and deserve special attention:

  • If the line %K crosses the line %D from the bottom upwards, it indicates the appearance of a bullish trend, you should get ready to buy (trend trading strategy).
  • If the line %K crosses the line %D from above, it indicates a bearish trend and we should get ready to sell.
  • In both cases, you can place pending orders about 10 pips above or below the breakout point, respectively.

 

Disadvantages of the Stochastic indicator

In general, the main claim to Stochastic is a disadvantage of all oscillator indicators. The fact is that such indicators work effectively only on stable trends with a clear direction. This indicator is not suitable for scalpers (arrow scalping strategy). However, even this disadvantage can be corrected, for example, by using in MetaTrader4 from NPBFX a bunch of two indicators with different periods. In general, to achieve the most profitable effect, you should not use only one Stochastic indicator in a trading strategy – it is rather a basic oscillator than a full-fledged trading strategy (Best Forex Strategies).

The MACD indicator is also an oscillator and is called a trend oscillator. The construction of the indicator is based on the data of two moving averages, the averages are not visible on the chart itself, only their readings are used. Also like Stochastic, the indicator is displayed under the main chart, and it looks like a histogram with an additional line. The main difference of the MACD indicator is its high versatility, as it can work on a trend section of the market.

npbfx.org MACD settings

Basic recommendations for the MACD indicator settings:

  • Fast and slow EMA and there are sliding bars, on which the indicator histogram is built. The greater the difference, the sharper the pattern. In most cases the indicators are left unchanged.
  • MACD SMA is a parameter of the moving indicator itself. The value of this parameter determines the distance of the sliding indicator from the histogram and the frequency of their intersection.

The screenshot below shows what the indicator zone looks like.

NPBFH MACD zone

 

Example of using the MACD indicator

This screenshot shows a simple MACD indicator work on EUR/USD using standard parameters of the indicator installation in the trading platform MT4 NPBFX. If the signal line (sliding line) crosses the zero line upwards, it means that you can open a buy trade, and if it crosses the zero line downwards it means that you can open a sell trade.

NPBFX MACD work

Divergences and convergences are considered some of the most important features of the MACD indicator. A divergence appears when the chart shows two consecutive highs (2 above 1), between which there is a slight pullback. The indicator also makes two highs, but the 2 is lower than the 1. This situation indicates that the movement is going down, and thus a further reversal of the trend is possible. Convergence is the opposite phenomenon, which appears in a bear market.

NPBFH divergence and MACD convergence

This signal can be used as a signal to exit the deal or a signal to enter the beginning of the trend. In general, market professionals advise to use several indicators at once in order to achieve the most effective result. It will allow you to determine precisely the right moment to enter the market and make sure your own decisions are correct. Stochastic and MACD indicators can be well combined with each other.

You can try the indicators in action at reliable broker NPBFX, the company has a profitable promotion “Trading welcome bonus up to 50%”! According to the conditions of the promotion, you can get up to 50% from the deposited amount on your real trading account, if you have not performed any transactions on the company’s real accounts before. Who is eligible for 50% bonus? All new clients who are using Master account and have not made any transactions in their NPBFX accounts before.

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What is the advantage of bonus funds? With these funds, you will significantly “prolong the life” of your account, as funds are accounted on the balance and are available for trading operations. However, they will be taken into account in the calculations of transactions made only after the total amount of funds available in the account becomes less than the amount of accrued funds. Thus, this bonus will be your safety net in case of unsuccessful trading. Open an account with a reliable company, conquer new financial peaks in the Forex market with indicators. It only takes you a few steps to become NPBFX client – go through the simple registration procedure and get access to all the trading and demo accounts in your personal cabinet.

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