How to Use Stochastic and MACD

Stochastic:

Stochastic:

The Stochastic has two sub-features, Slow and Fast. Slow Stochastic is generally used as it provides much more dependency. Fast Stochastic usually clutters the traders screen with too much information, which is why it generally isn't used by many.

The core use of the Stochastic is to determine when an upward or downward move is going to occur by seeing where the two lines cross. The most important thing to know about this indicator is that it tells the trader absolutely nothing until the lines cross below or above the 20 and 80 markers on the indicator. There should be lines drawn on the indicator itself at these markers.

In the picture below, you can see at Point 1 that the two lines have gone below the 20 line and crossed each other. This is what's called a Bullish Cross. It indicates that an upward movement is imminent, as you can see in the direction which followed. Point 2 shows the two lines crossing above the 80 line. This is called a Bearish Cross. It signals an imminent downward movement, as you can see.

Can you find the Bullish and Bearish Crosses in between Points 1 and 2? Do you see the movements of the price which followed? This is how the Stochastic works. The size of the predicted movement will vary, but the movement will almost always occur.

MACD:

The Moving Average Convergence/Divergence (MACD) operates pretty much the same way as the Stochastic. There is a central line at the level of 0.0. The red bars show relative strength of the current trend, but don't tell the trader much of anything useful.

The important aspect of this indicator is the two lines floating around very close to one another. When these two lines cross one another above or below the 0.0 line, it signifies a reversal to the recent trend. You can see the results in the chart below.

Again, can you find the other 2 instances in which there are significant crosses and pick out their respective impact?

How to Use Stochastic and MACD

By: Douglas Brown

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