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Help regarding MACD, Stochastic, RSI & Divergence

  • #1
  • First Post: Jun 23, 2009 8:23am Jun 23, 2009 8:23am
Hey Guys,

I am a newbie in forex trading and i will really appreciate if anyone can share their experience regarding MACD, Stochastic, RSI & Divergence.

A little about how i trade:
* Time Frame: Daily Charts
* Currency: GBP/USD
* Indicators Used: MACD, Stochastic, RSI & Divergence (all defaults mode)

Now what i will like to know/seek advise on is:
* Can i use all these indicators together?
* Can i used them on defaults modes? if not, what's the best setting for each of these indicators for my trading style/period....and also why?
* Do they work well together?
* Are they enough as an indicators for traders to make trading judgments? if not, what other indicators do i need to compliment/use together with the indicators that i'm currently using?

I do use MACD, Stochastic, RSI & Divergence indicators at this moment trading demo.I always make sure that at least 2 - 3 of these indicators are giving me the same trend/direction signals before i place my trade. And yes, they are profits...... (please tell me what you think about this approach? is that a correct/good way to read the charts?)


Guys, please do not hesitate to post replies and answers to my inquiry.


I thank you for your time and hope you have a great day




Cheers
  • #2
  • Jun 23, 2009 10:29am Jun 23, 2009 10:29am
I can answer this from my own experience. I'm not sure if it will properly answer your question. I have had two years experience trading Forex and a few earlier years stocks. I spent the first year perfecting a system using just the indicators you describe. It worked most of the time. I used up several A4 pads of squared paper and pencils back testing. The settings I used were MACD 5,13,1 RSI 14 stochastic 14,3,3. All the time I was also drawing on knowledge from Philip Nel's 4 hour thread. I worked so hard I got RSI (repetetive strain injury not relative strength index LOL) in my arm which I thought was an imaginary complaint until it afflicted me.

By sticking to the rules I could make a profit, but there were large draw downs. There was the potential to blow the account. I learned about divergence from various sources notably babypips.com. I can tell you it's a useful indicator but not so good for predicting tops or bottoms. Divergence can go a lot further than your account.

By learning about support and resistance levels, price action, break out strategies and trends I can now usually enter a trade knowing there is a high probability it will go into profit with a low potential draw down. If it behaves unpredictably I close it quick. I am never "right". The market is, always.

Although I do use indicators and know that they can work I am sceptical about whether an inexperienced trader can use them profitably. I mean any indicators. Do yourself a favour and learn about trading before you use indicators. Then look at indicators with interest, see how and when they fail, when they succeed.
Gone to a better place
  • #3
  • Jun 23, 2009 1:23pm Jun 23, 2009 1:23pm
Quoting mohamedrizal
Hey Guys,

I am a newbie in forex trading and i will really appreciate if anyone can share their experience regarding MACD, Stochastic, RSI & Divergence.

A little about how i trade:
* Time Frame: Daily Charts
* Currency: GBP/USD
* Indicators Used: MACD, Stochastic, RSI & Divergence (all defaults mode)

Now what i will like to know/seek advise on is:
* Can i use all these indicators together?
* Can i used them on defaults modes? if not, what's the best setting for each of these indicators for my trading style/period....and...
Let's go abt it in chunks...

Quote
Can i use all these indicators together?
You sure can. In fact I think I read abt someone who has a system based entirely of the three indicators you mentioned. I don't think I am allowed to post the link here but I'll pm you.

Quote
Can i used them on defaults modes? if not, what's the best setting for each of these indicators for my trading style/period....and also why?
I've never used them together so I won't be able to help you on this but again the link in the pm may assist you.

Quote
Are they enough as an indicators for traders to make trading judgments? if not, what other indicators do i need to compliment/use together with the indicators that i'm currently using?
The 3 indicators you mentioned are the most common and a proper combination will work if you know how to effectively apply them.

abt them being sufficient, I would only recommend you to try and extract hints of price movements from PRICE ACTION too. We have some good threads across FF that teach you just that:

Like:

1) James16chart thread (interactive trading)

2) Silent service method (Trading systems)

3) No brainer trades (interactive trading)

All of these threads and some more teach you how to read price naked without any indicator assistance....information valuable for every trader, Once you attain it you can then look to add the indicators you want in an attempt to further enhance your method if you wish. Sorry if I sound monotonous or too bookish. Hard work earlier on is a prerequisite. the sooner you realize this the stronger is your chance of making it in this business.


EDIT: I could not pm you. You need more posts under your name.

Regards,
Ghous.
I believe . . .
  • #4
  • Jun 27, 2009 5:13pm Jun 27, 2009 5:13pm
I think you should use 1 indicator first, and see how it works, - before you add another indicator to your system.

many indicator can makes you confuse.

________________

RSI Divergence

.
  • #5
  • May 29, 2010 2:25am May 29, 2010 2:25am
Quoting mohamedrizal
Hey Guys,

I am a newbie in forex trading and i will really appreciate if anyone can share their experience regarding MACD, Stochastic, RSI & Divergence.

A little about how i trade:
* Time Frame: Daily Charts
* Currency: GBP/USD
* Indicators Used: MACD, Stochastic, RSI & Divergence (all defaults mode)

Now what i will like to know/seek advise on is:
* Can i use all these indicators together?
* Can i used them on defaults modes? if not, what's the best setting for each of these indicators for my trading style/period....and...
From my two years and almost a half of trading, I can say that from the three indicators you asked for their info, only Stochastic is good for divergences but, even so, it depends very much on the configuration setup, if are faster (5,3,3) or slower (9,3,3 or 14,3,3).
Regarding of the MACD, I dislike the way of drawing the peaks and the bottoms and the frequencies of the appearance of the divergences are not very often, as you maybe already know (5,34,9 configuration). As a replacement for it, I use Osma.
RSI, I consider it's not very good for picking divergences (on 14 configuration) and should be used for oversold/overbought level or reversing from one to another. Hope, I made you a clear image about these three indicators.
  • #6
  • May 29, 2010 9:56am May 29, 2010 9:56am
Indicators are another way to look at price action, but they will always lag price action. Learn the basics about what each indicator is actually telling you, and also the limitations of them.

Some indicators work best in trending markets, others in ranging markets. There is no one size fits all, this is where you have to study & backtest.

I personally, would use MACD with either Stochastics or RSI, not both. Stochastics & RSI are similar.

Use them as confirmation tools to aid trade entry & exits. They may help you to guage Price action around Supports, Resistance Levels, Pivot Points, Trendlines and Moving averages.
It never gets easier, you just get better
  • #7
  • May 29, 2010 1:50pm May 29, 2010 1:50pm
If you're using these indicators for anything other than determining higher highs and lower lows ... don't waste your time.

MACD works best on higher timeframes so you got that portion right. MACD also is NOT a tool for entry and/or diversion. MACD is best at determining the trend. Thats all. It shouldn't be used for anything else.

In fact any trader that considers 'em self a true trend trader know MACD is all that traders needs. Here's an example:

1) Macd itself and the 0 level is all you need. Macd Signal line and histogram are not required. So if you can take them them off your Macd chart, then do so.

2) Zero (0) level determines the trend.

3)When Macd break through the 0 level, always expect a retracement bounce off the 0 level and back in the direction of the trend. This is called a Trend Continuation and is best known as price "testing" level. In a typicle trend price may test and retest a level mutiple times. In any case this is good, allowing you to reload your positions in the continuation direction of the trend.

Attached Image (click to enlarge)
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In the example above.

1) Macd broke above 0 level - indicating a new Bull trend is in the works
2) Macd retraced back to the 0 level - indicating price actions first test of a new trend. Look at price action and you'll see I drawn a trendline to help you see the first test of macd and the price action off the trendline.
3) Macd continues in direction of new trend (Bull) and you'll see it's valid using the trendline as a visual.

This is how to properly trade Macd. If you're using Macd for anything other than that ... you're wasting your time and equity.

I'll let you figure out the down trend. Clue: once the MACD line is over 0 level (indicator up), you'll see the opposite setup afterwards. A break in the Bear direction and a retest which indicates a validation of a new trend.

Which brings us to why the EurUsd is down. So for those who trade EU, you've got something on your side for Monday. Trend is down; Macd line below the 0. Indicating shorts are in power. When Macd rises up and touches the o, always anticipate a retrace and bounce, which will give you a valid trend change. If you get no retrace and bounce, then trend change is invalid.

Remember, if you are interesting in trend trading, always keep a not on Higher Highs or Lower Lows price action. By identifying that you you won't need Macd nor trendlines.
  • #8
  • May 29, 2010 2:06pm May 29, 2010 2:06pm
Quoting Jhig
In fact any trader that considers 'em self a true trend trader know MACD is all that traders needs. Here's an example:

1) Macd itself and the 0 level is all you need. Macd Signal line and histogram are not required. So if you can take them them off your Macd chart, then do so.
Nice Explanation and I've never really looked at Macd in the way you described. I've only used it for looking for divergence. BUT the divergence is just 'extra' confirmation after S/R and price action have shown the way.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #9
  • May 30, 2010 4:21am May 30, 2010 4:21am
Macd is basically a cross of 2 moving averages, typically the 12 ema with the 26 ema. On the indicator the horizontal line is the 26 ema. The line is the 12 ema. So having a Macd line only is no better than having 2 moving averages on your chart and trading the cross. Try it & see.

Where the Macd is better than the chart moving average lines, is the divergence patterns formed by the line on the indicator against the price on the chart, you can portray the line as a histogram also.

A conventional Macd has a histogram and 2 lines, Fast ema 12, slow ema 26, and a signal line 9 ema. The histogram on this type of macd is the difference between the 12 ema & it's 9 ema, often called Osma.

Now what happens here is the 12 ema crossover of the 26 ema will alert you to the main trend direction, but the Osma will alert you to Hidden Buying & Hidden Selling using divergence patterns with price, this is what it's best used for.

As the Osma is the difference between 12 ema & it's signal line, it can become positive/negative even while the Macd line is below/above the 0 level.

A good tool in trending markets but a disaster in ranging markets as it is based on moving averages, you will get whipsawed to death by it.
It never gets easier, you just get better
  • #10
  • May 30, 2010 5:11am May 30, 2010 5:11am
Quoting Jhig
If you're using these indicators for anything other than determining higher highs and lower lows ... don't waste your time.

MACD works best on higher timeframes so you got that portion right. MACD also is NOT a tool for entry and/or diversion. MACD is best at determining the trend. Thats all. It shouldn't be used for anything else.

In fact any trader that considers 'em self a...
I implemented a methodology based on the divergences (cci, stochastic, or osma), with a break on a trend line and locking the profit at 1 pips on a first suport/resistance which appears after the break of the trendline and even if the market it's in range it works just fine, because the zone which actions like a trigger to my locking in profit it happens to be near 15 pips lower/high
very often.
Attached Image(s) (click to enlarge)
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Click to Enlarge Name: gbpchf1h2.PNG Size: 38 KB
  • #11
  • Jun 2, 2010 1:09pm Jun 2, 2010 1:09pm
Quoting Jhig
If you're using these indicators for anything other than determining higher highs and lower lows ... don't waste your time.


Remember, if you are interesting in trend trading, always keep a not on Higher Highs or Lower Lows price action. By identifying that you you won't need Macd nor trendlines.

Very good.
  • #12
  • Jun 2, 2010 1:58pm Jun 2, 2010 1:58pm
Quoting Shabs19
Macd is basically a cross of 2 moving averages, typically the 12 ema with the 26 ema. On the indicator the horizontal line is the 26 ema. The line is the 12 ema. So having a Macd line only is no better than having 2 moving averages on your chart and trading the cross. Try it & see.

Where the Macd is better than the chart moving average lines, is the divergence patterns formed by the line on the indicator against the price on the chart, you can portray the line as a histogram also.

A conventional Macd has a histogram and 2 lines, Fast ema 12,...
Just curious has anybody ever used the different colored Osma bars to trade? I have seen requests on the web from traders requesting charts with colored Osma bars. As most of the Osma histograms come in just one color, so just curious why would someone request for colored ones.
Make your losses in demo. Earn your profits live.
  • #13
  • Jun 2, 2010 3:48pm Jun 2, 2010 3:48pm
Quoting Forexia
Just curious has anybody ever used the different colored Osma bars to trade? I have seen requests on the web from traders requesting charts with colored Osma bars. As most of the Osma histograms come in just one color, so just curious why would someone request for colored ones.
It's a silly request in my opinion. You can change the color in the metatrader and other platforms, even Java ones.
  • #14
  • Jun 2, 2010 4:48pm Jun 2, 2010 4:48pm
You can get 4 colour Osma to reflect, rising/falling above 0 level and rising/falling below 0 level. Can be useful, used with MACD.
It never gets easier, you just get better
  • #15
  • Jun 29, 2010 7:02am Jun 29, 2010 7:02am
Whichever indicator gives you the best result that is the one you should use for your signal. If you have a 55% percent trading strategy with RSI, adding a MACD will not improve your results if the MACD on its own does not exceed 55%. If multiple indicators were true then you could have 4 that were right 25% of the time and when they all said "go" you would always be right.

Then of course you would have to deal with risk because no matter where you enter, you have to know where the risk level is to make the trade successful. You could have a good entry and set your SL 25 pips away and get stopped out and what you needed was 30 pips away. SLs then are random points.

You minimize your risk actually with one indicator or with something simple like the James16 price action because you are deciding to trade using one decision point although James16 traders use indicators and other devices like Fibs to find confluence at the point of a trade.

RSI will give you both divergence signals and reversals. Reversals are less known but are more statistically reliable in particular when used with statistical data and using one MA in terms of a an mean reversion - as this is one of the most typical ways that large banks and hedge funds determine their positions.

These players are the ones that create direction and momentum in a market move. Your job as a trader is to recognize it.
I have statistical data charts that are current for divergences and reversals on RSI in relation to 3 different often used MAs however I am not able to attach anything for some reason, but if you send me a private message I can get them to you that way.
If anyone has an idea how to get my attachments to work, I would appreciate it. When I click on the button, nothing happens.
Paul
  • #16
  • Jun 29, 2010 10:51am Jun 29, 2010 10:51am
Hi Jhig

Your explanation on 2-lines MACD is very enlightening.
If you don't mind, is there a source to look up for further reading?
I wish to see how possible it can incorporate into my method.
Thanks.
  • #17
  • Jun 29, 2010 11:42am Jun 29, 2010 11:42am
Quoting snake
Hi Jhig

Your explanation on 2-lines MACD is very enlightening.
If you don't mind, is there a source to look up for further reading?
I wish to see how possible it can incorporate into my method.
Thanks.
Sorry Snake, this is something a trader friend of mine and I saw in MACD a few years back. I have yet to see anything like this on any trading site or book. Though the basic of MACD can be found anywhere, the 1st/2nd trend bounce was something we came up with.

This MACD trend strategy works well on all time frames but we found the it's best to use it on timeframes higher than 4hour. Just keep the zero level in mind and use that level to determine trend up/trend down. MACD line breaks above = trend up, MACD line breaks below = trend down. To validate a new trend, always watch for a 2nd bounce and wait for price to continue the trend direction.
  • #18
  • Jul 6, 2010 8:11am Jul 6, 2010 8:11am
Quoting Jhig
If you're using these indicators for anything other than determining higher highs and lower lows ... don't waste your time.

MACD works best on higher timeframes so you got that portion right. MACD also is NOT a tool for entry and/or diversion. MACD is best at determining the trend. Thats all. It shouldn't be used for anything else.

In fact any trader that considers 'em self a...

this is perhaps THE most useful n simplest tip that i'v ever seen in this forum(was just too lazy to even register , n i read only ).

basically i use guppy ema, macd n rsi on mt4,that's all. macd is used as a confirmation to the change in the direction of guppy ema. n i enlarged the default figures of both rsi & macd to eliminate noises, all i care abt macd is whether it's is above or below the zero line n i just ignore all macd divergence "signals"coz i found them misleading most of the time. as to rsi i use it as a divergence indicator,i keep my eyes open when it appears. overall i stay in the trade as long as the price is above/below the bottom/top line of guppy's slower ema group, n i move my sl accordingly. it works fine in any tf as long as it's not ranging
  • #19
  • Nov 4, 2010 7:44am Nov 4, 2010 7:44am
Does anyone know how to program the Macd a a Ma like in the chart to explain how to use the MACD> That was a great explanation and example of how to use a MACD for a set up trend move. Bravo I just don't know how to duplicate the MA etc. over the MACD Line Thanks in advance if anyone is there.
  • #20
  • Nov 5, 2010 5:13am Nov 5, 2010 5:13am
If you are using The standard MACD 12,26,9 then just place 2 ema's on your chart 12 ema & 26 ema and observe the crosses, they will be the at the same place as the Macd Line crossing the Horizontal line.

MACD Line above zero, when 12ema is above 26 ema & vice versa.
It never gets easier, you just get better
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