The stock market is very volatile and traders need to be very active. As a subtle action in the business world may have a huge reaction over the bourses and stock prices. But, the best part is that traders are provided with an abundance of smart indicators and tools for making a valid decision.
And the content will be showcasing some of the valuable tools or indicators that will enhance the profits.
The article will be revealing the best strategy that you can use with a common indicator and improve the stock trading winning rate. The indicator that would be helpful in this technique is MACD or the moving average convergence divergence. It is one of the most simplest and popular indicators used by traders essentially it is a trend-following indicator that shows the relationship between two moving averages.
First, we need to know how does the MACD works? There are four components to the MACD, we have two lines:
The MACD line and the signal line: The signal line notices the difference between the two while the MACD line moves faster and is more sensitive to price changes. That is the main focus of the MACD indicator is to compare that to the signal line which reacts slower to price changes.
The histogram: It represents the difference between the MACD line and the signal line for example if the line crosses above the signal line the histogram will turn green and if it crosses below the histogram will turn red. The gap between the MACD line and the signal line also affects the size of the histogram.
The zero line: It simply represents the center of the MACD indicator now the way traders utilize this indicator to identify momentum is by looking at the crossover between the MACD line and the signal line.
How to apply the strategy to live trading?
Find out how this strategy is helpful for improving the stock trading winning rate. For example, if the MACD line crosses above the signal line it indicates that the market is on an upwards momentum. And if it crosses below it indicates that the market is only downwards momentum. Traders can also utilize the size of the histogram to determine the strength of the momentum itself.
If the MACD crosses above the signal line while the histogram is getting larger it shows us that the upwards momentum is getting stronger. Similarly, if the histogram is getting smaller in size it indicates that the upwards momentum is getting weaker.
Now we’ve already established that the MACD is based on moving averages and so the question is why should you use the MACD and not the moving average. Well, let me give you a quick answer that MACD forms the crossover between the MACD line and the signal line. The crossover on the MACD gave a much earlier entry signal compared to the crossover on the moving average that’s why traders should prefer it as a good momentum indicator.
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A common mistake that traders make while implementing this strategy
Using this indicator is a bad idea when the overall market is only on a downtrend. However the MACD is crossing over upwards, so you shouldn’t use the MACD because it shows us only the short-term momentum and as traders, we also need to take the long-term trend into consideration because we never want to trade against a trend.
So, a simple but high stock trading winning rate strategy that I recommend for beginners is by combining the MACD with a long-term trend indicator like the 100 ema. This way we can safely trade the MACD while making sure that we’re staying within the same direction of the long-term trend.
Improve the stock trading winning rate with combined indicators
All in all the first step is you want to identify the long-term trend by looking at the 100 ema if the price is above the 100 ema it indicates that the long-term trend is up and if the price is below 100 ema it indicates that the long term trend is down.
So once you’ve identified the trend the next step is we want to look for crossovers on the MACD that shows the same signal as the long term trend so in this particular example we can see that the long term trend is up meaning we only take signals when the MACD crosses over upwards and so here’s where you want to take a long position.
Now for your exit strategy, you can place your stop loss at the nearest swing low and set your profit target at 1.5 times your stop loss, and as you can see this trade ended up being profitable. Let’s look at another example when the price is below the 100 ema indicating that the long-term trend is down.
Next, we have a cross down on the MACD and so that will be our entry signal to go short now for your stop loss place it above the nearest swing high and set your profit target at 1.5 times your stop loss, and as you can see the price hits our profit target and so this counts as a successful trade.
That was a simple MACD strategy for beginners that you can use now for advanced traders. If you want to get more profits using the MACD you cannot simply rely on beginner crossover techniques because remember crossovers tend to work only on trending markets.
Applying the strategy at different time frames and conditions
If the market is on a range like this the indicator will give you many false signals so that is why if you want to increase the win rate. I recommend using a more advanced version of the strategy which is by combining the MACD with price action.
Here’s how the strategy works the first step is we need to choose a time frame. In most of cases traders using the four hours time frame. Now the next thing you need to do is identify a key level within this time frame. You may see the price went up to hit and reverses downwards and so we can draw a resistance line up.
The next step is you want to wait for the price to approach the same key level once again now once this happens we are expecting the price to reverse downwards. However, just because the price touches a key level doesn’t guarantee that a reversal will happen.
Because key levels aren’t magic prices can always break right through and that is why we need to use extra confirmation to make sure that there is actual downwards momentum. When price touches this area which is where the MACD indicator comes into play. Now what most traders will do is that they’ll actually wait for the MACD to cross over downwards before taking a short position.
However by doing this notice that the downwards movement has already been made and you would have entered in late. A secret trick that I used to get an earlier entry signal is by zooming in two-time frames below. Taking the latest incident, I was in the four-hour chart so let’s zoom in on the two-hour chart. The two-hour chart and all we need to do is wait for the MACD to cross over downwards in this new smaller time frame.
So this is where you want to take a short position. So, now let’s go back to the 4-hour chart and compare the two entry signals. so now we’re back at the 4-hour time frame and notice if you would have used the crossover from the two-hour time frame you would have entered in the trade here.
But if you would have used the crossover from the four-hour time frame you would have entered in here and even though both trades ended up being profitable the smaller time frame crossover still gave us an earlier entry signal.
Looking at the strategy one more time on the two-hour time frame and over to the left we can see that prices went down hit and reverse upwards. Making this a key support level now as prices went back to this level again. We want to confirm that there’s actual upwards momentum as price touches this area so again you want to zoom in two time frames below and apply the MACD indicator.
Now, all we need to do is use the MACD to confirm the bullish momentum by waiting for it to cross over upwards once this happens you take a long position. Going back to the two-hour time frame and apply our exit strategy so for our stop loss.
You can place it at the key level and set your profit target at 1.5 times your stop loss and as you can see this trade ended up being profitable.
I just revealed to you high win rate MACD strategies that you can immediately use right now and all I ask for in return is for you to invest two seconds of your time into a comment. Most of the traders use this technique partially and end up making losses or no profit as per calculations.
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