Both the IMACD and the Stochastic are foreign exchange trading indicators that can deliver enhanced trading analysis to the alert trader. In this article we look at how to combine this powerful duo to make your trading entries and exits even more cutting edge.
Combining The Stochastic And IMACD Within Your Foreign Exchange Trading
The Stochastic Briefly Explained. Essentially the Stochastic is a momentum indicator that is constructed of two lines – the fast (%K) and slow (%D). These lines oscillate between 0 and 100, with the two key levels being between 20 and 80. Traditionally, when the stochastic is above 80, the currency pair is overbought, and when below 20 it is oversold. The real key is the direction that the Stochastic is travelling in. When exiting the 80 in a downwards fashion, the trader should be braced for a price fall. When exiting the 20 level in an upwards way the trader should expect a rise in the price. Traditionally, the Stochastic when employed by itself is traded when there is a crossover of the two lines. Note that while 20 and 80 are traditionally the key levels used to trade, in this strategy we will change these key levels to 40 and 60.
The IMACD Briefly Explained. The IMACD is a custom variation of the ever popular MACD. It is essentially a trend indicator and some foreign exchange traders believe it offers tighter market signals than the traditional MACD. The IMACD, much like its more traditional sister, has its own histogram so traders can gauge the trend based on whether the histogram is above or below the horizontal line.
Using The IMACD And Stochastic Collectively Within Your Foreign Exchange Trading. The first thing we do in this strategy is look for a crossover of the IMACD lines. We then cross check this to the positioning of the Stochastic to let us know whether there is indeed a confirmation of the buy or sell signal.
A buy signal is confirmed when we see the following on the foreign exchange chart:
- The IMACD lines crossover in a bullish way.
- The Stochastic indicator should be heading UP and be at or beyond the 40 level.
- The price action should not be at or near a resistance point.
- The final confirmation signal should come from the price action itself – we would be looking for the NEXT price candle to be bullish.
- When all these conditions are met, the trader should open a LONG position.
- This strategy works better on higher timelines.
A sell signal is generated when the following conditions are met on the foreign exchange chart:
- The IMACD lines crossover in a bearish fashion.
- The Stochastic should be heading DOWN and be at or below the 60 mark.
- The price activity should not be hovering at or near an established support level.
- When the above conditions on the Stochastic and IMACD line up our confirmation would need to come from price action itself. We would be looking for the next price candle to display bearish velocity to receive a confirmation.
- When all the conditions above are satisfied, the trader would open a short position.
- Again, it’s better to target the higher charts (such as daily or the 4 hour) when employing this strategy.