MACD or stochastics.....

[none9999]

I have been trying to understand and develop a system using the technical indicators. I am trying to keep it simple and so far have decided on the following:

a) MA
b) OBV
c) MACD
d) Support and Resistances
e) ADX

However, I have noticed MACD and Slow stochastics keep giving me contradictory results very often. I do realize that stochastics are a lot more sensitive than the MACD but I am confused on how to correctly use them. I should add here that I am talking about position/swing trades here and not day trading. If I blindly follow the stochastics, I will be buying-selling everyday!! Looking at some charts, I see that MACD is more reliable than stochastics....Is this necessarily true?? Any help on the above and the proper use of stochastics with respect to other indicators will be greatly appreciated!!!!

Also, any other important indicators that I should worry about??

Thanks!! :beerglass:

[Hirsch]

If you're talking about MACD, all of the Stochs (slow is the better one in my opinion, glad to see it's the one you're using), then give or take some support and resistance lines, unless we're talking hypothetically it's best to give some kind of example stock or chart.

But not getting into that because others could explain that much better than myself, what period of time are you looking at on the chart? Really we need to broaden the subject here and get a better idea of what you're seeing.

If you want a quick answer, is this stock cyclical, seasonal, etc? Does it follow a pattern? Or, does this stock seem to indicate a larger trend and movement over a long period of time? Often you just need to look at more to figure out how to interpret current indicators, because from the looks of it you're seeing contradictory movement of daily or weekly trading which is normal. But then it really depends on what the stock is.

Does that help?

[none9999]

If you're talking about MACD, all of the Stochs (slow is the better one in my opinion, glad to see it's the one you're using), then give or take some support and resistance lines, unless we're talking hypothetically it's best to give some kind of example stock or chart.

But not getting into that because others could explain that much better than myself, what period of time are you looking at on the chart? Really we need to broaden the subject here and get a better idea of what you're seeing.

If you want a quick answer, is this stock cyclical, seasonal, etc? Does it follow a pattern? Or, does this stock seem to indicate a larger trend and movement over a long period of time? Often you just need to look at more to figure out how to interpret current indicators, because from the looks of it you're seeing contradictory movement of daily or weekly trading which is normal. But then it really depends on what the stock is.

Does that help?

Thanks! I came this trend i.e MACD and Stochastics moving in opposite directions in quite a few daily charts, and obviously it happens all the time in intra day charts. And trying to come up with a successful strategy for position trading, its the inconsistency in daily charts that worries me :|
BTW, the total time period I am talking about here is on the scale of a week.

For MACD the parameters are the usual 12,26,9
For Slow Stochastics - 5, 3

And no, I am not looking at any cyclic or seasonal stocks or none that show that pattern anyway.

What I realized since I wrote the first post is that I can actually take the general trend from the MACD and the exact buying or selling point during a particular day from Slow Stochastics on a 15 min intraday chart.

But on daily charts, what would be the right strategy if MACD is over zero and divergence is becoming greater and the Slow Stochastics are indicating way into overbought territory??

Also, any other indicators I should follow along with those mentioned in my first post?? Thanks!!

[wallstreetsedge]

you can get away using just MA and w/ support/resistance and be well off

[none9999]

you can get away using just MA and w/ support/resistance and be well off

Thanks WSE! So, you mean to say one can do it without using any of the oscillators at all?? Or lets put it this way, using which oscillators do you think will increase the reward to risk ratio on trading just via MAs and support/resistance??

Thanks!!

[wallstreetsedge]

if you want to use oscillators, you dont need any overlays.. you can simply use support/resistance but the oscillators will depend on how you plan on trading.. day, swing, longer?

to keep it simple, if you dont have much experience, start with candlesticks and learn how to trading using them only.. then move on to using candlesticks with volume, then candlesticks with bollinger, then candlesticks with support/resis and just build up slowly

[zyzzyva57]

Try these settings for syn'ing:

MACD: 8-17-9
SLOW STOCH: 14-5
MA: 10-20-50

See, the Slow Stoch catches the major market movers, but they have to move in and out slowly because of their enormous size; therefore, this sync with the MACD who are the smaller herds, you, me, and Cramer now

Note, too:
RSI: > 60 <70
VOLUME: UP SIGNIFICANTLY
Volume should confirm the RSI -- See RSI alone can be up giving a misleading view of interest, e.g., a simple illustration: on eBay an item is hot between two bidders, but this will stop when one drops out--3 bidders is better and so on, i.e., Volume!


And if you want to understand Master Cramer when he talks about P/E and Growth, just think the PEG ratio found under Key Statistics at Yahoo Finance:
PEG: <1 = UNDERVALUED
PEG: >1 = GROWTH
PEG: >2 = OVERVALUED

[none9999]

if you want to use oscillators, you dont need any overlays.. you can simply use support/resistance but the oscillators will depend on how you plan on trading.. day, swing, longer?

to keep it simple, if you dont have much experience, start with candlesticks and learn how to trading using them only.. then move on to using candlesticks with volume, then candlesticks with bollinger, then candlesticks with support/resis and just build up slowly

Thanks! Guess its time to get Nison. From what I have heard, it just has pretty much everything about candlesticks but it doesnt have much about trading strategies. Anything else you could recommend apart from Nison?? Thanks!

And to answer your question, I plan to be a swing trader....And I am just wondering how important is it to buy stocks with strong fundamentals in swing trading? I was thinking about adding the CANSLIM approach along with technicals....but that I am guessing might be a question for another thread.

[none9999]

Try these settings for syn'ing:

MACD: 8-17-9
SLOW STOCH: 14-5
MA: 10-20-50

See, the Slow Stoch catches the major market movers, but they have to move in and out slowly because of their enormous size; therefore, this sync with the MACD who are the smaller herds, you, me, and Cramer now

Note, too:
RSI: > 60 <70
VOLUME: UP SIGNIFICANTLY
Volume should confirm the RSI -- See RSI alone can be up giving a misleading view of interest, e.g., a simple illustration: on eBay an item is hot between two bidders, but this will stop when one drops out--3 bidders is better and so on, i.e., Volume!


And if you want to understand Master Cramer when he talks about P/E and Growth, just think the PEG ratio found under Key Statistics at Yahoo Finance:
PEG: <1 = UNDERVALUED
PEG: >1 = GROWTH
PEG: >2 = OVERVALUED

Thanks zyzzyva57! So, if I understand correctly, what you are suggesting is I make the MACD more sensitive and Stochastics a little less sensitive. At least, that's what I understand by the change in parameters....

I was already using PEG for my fundamental analysis along with quarter to quarter and annual EPS growth, P/B and to some extent P/E.

[zyzzyva57]

(Example)
(http://finance.yahoo.com/echarts?s=goog#chart1:symbol=goog;range=1y;indicat or=ema%2830%29+dividend+rsi+macd%2814,%205,%209%29 +stochasticslow%2814,5%29;charttype=candlestick;cr osshair=cross;ohlcvalues=0;logscale=off;source=und efined)
You can see this in my example how these metrics track together with Google, which is a great stock to study, because it is both a great investment or stock to trade

The SS is slow, because the Huge, Huge Money Wall Street Herds have to move slowwww -- when they want to make a move these moves can affect a stock's price for a long period, which the "Cramers" can only get bounces (MACD)

What you want are these confirming buy and sell signals: the Big Herds are forming a bigger herd, e.g., moving in or out of oil -- Confirmed by the "Cramers" which is then cemented by Volume

If you are the Buffett (good PEG or Value) type, you buy in when the above are stampeding out of quality companies

"An investment operation," Benjamin Graham's classic book on value investing wrote in his first book, 'Security Analysis,' "is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

Take my example above which should be set up for you to see and run some stocks through the charts to see my points of sync'ing metrics

[none9999]

I havent had the time to digest all that you have written but I just saw the graph you have linked and its amazing!!!! Have never seen anything like this as far as MACD and Stochastics are concerned!! Thanks!!

If you dont mind, I will bother you with more questions when I am done looking into what you have explained in more detail....Thanks!

And I would like to be a Buffet kind of investor but have no patience for that!! Would rather have a mixed bag of shares with some being for long term investment and some I can have fun with and at the same time, earn some money (hopefully)....

[zyzzyva57]

I will be delighted to pass along what I am learning, but I am an advanced Newbie

I got these metrics from the best investment book out there "Rule #1" by Robert Towns

It is the book Cramer should have written, because "Real Money" is so lame, e.g., why he won't simply use the PEG instead of his convoluted method, which is actually the PEG, baffles me

"Rule # 1" makes the Real Cramer and Buffett and Saint Benjamin Graham understandable, plus how to use Yahoo Finance and Microsoft Money web sites

Your library may have a copy, but I bought copy since I reread this book so often when I get bogged down

[Hirsch]

Well zyzzy pretty much settled it for now, but in case you're still wondering don't worry about Fundies too much if this is where you're going. You'll spend way too much time double-checking and interpreting when you could be looking out for a trade, or watching the big boys work.

[none9999]

Well zyzzy pretty much settled it for now, but in case you're still wondering don't worry about Fundies too much if this is where you're going. You'll spend way too much time double-checking and interpreting when you could be looking out for a trade, or watching the big boys work.

Well, I am thinking the way to go is choose a stock based on fundamnentals and time the entry and exit using technicals. Maybe if you are a day trader, you can rely purely on technicals but I dont have the time to watch the screen all day. So, am thinking position trading with picking stocks on the basis of fundamentals is the way to go.

I welcome more opinions on this. Maybe some of you could please share your views on the above based on your experiences. Thanks!!

[aiki14]

Well, I am thinking the way to go is choose a stock based on fundamnentals and time the entry and exit using technicals. Maybe if you are a day trader, you can rely purely on technicals but I dont have the time to watch the screen all day. So, am thinking position trading with picking stocks on the basis of fundamentals is the way to go.

I welcome more opinions on this. Maybe some of you could please share your views on the above based on your experiences. Thanks!!

That's my strategy pretty much, I use a fundamental assessment to rule out companies I think are too risky, then use technicals to initiate positions. I still don't have the confidence in technical analysis to risk a bankruptcy announcement or SEC investigation crushing my position so I do a fundamental analysis to verify the position is at least unlikely to get that kind of bad news. This sort of hybrid strategy has been pretty good for me, I can sleep at night and have profited enough to do so on a comfortable bed.

[zyzzyva57]

Absolutely! Following a Buffett style is the best way to go: with a PEG equaling value, solid fundamentals, and Slow Stoch showing the Wall Street Big Boys have moved on, knowing they will return and leave, on and on and on

I simply enjoy the theory of the chart and Cramer to paper trade

Couple of charts I find interesting:

Note March, 2007: Jones Soda (http://finance.yahoo.com/echarts?s=JSDA#chart1:symbol=jsda;range=2y;indicat or=ema%2830%29+dividend+rsi+macd%2814,%205,%209%29 +stochasticslow%2814,5%29;charttype=candlestick;cr osshair=cross;ohlcvalues=0;logscale=off;source=und efined)

And who can forget the year long saga of dearly beloved Sirius (http://finance.yahoo.com/echarts?s=siri) to watch how the Big Boys moved in and out via the Slow Stoch indicating they clearly knew stuff as I look back in retrospect

Let me not forget the first stock Cramer back in his first shows of 2005 preached it was a great speculation stock (ala Sirius) as it went down, down, down...And what stock was it? (Click) (http://finance.yahoo.com/echarts?s=cpst#chart1:symbol=cpst;range=5y;indicat or=ema%2830%29+dividend+rsi+macd%2814,%205,%209%29 +stochasticslow%2814,5%29;charttype=candlestick;cr osshair=cross;ohlcvalues=0;logscale=off;source=und efined)

[none9999]

That's my strategy pretty much, I use a fundamental assessment to rule out companies I think are too risky, then use technicals to initiate positions. I still don't have the confidence in technical analysis to risk a bankruptcy announcement or SEC investigation crushing my position so I do a fundamental analysis to verify the position is at least unlikely to get that kind of bad news. This sort of hybrid strategy has been pretty good for me, I can sleep at night and have profited enough to do so on a comfortable bed.

Thanks aiki!! Coming from you, that means I am on the right path....Still far away from the goal, but at least on the right path!!

Do you mind sharing with me what tools do you use for TA?? Also, what is the relative importance you give to P/B and P/E ratios?? Thanks!! Others are most welcome to answer these too!

[none9999]

Absolutely! Following a Buffett style is the best way to go: with a PEG equaling value, solid fundamentals, and Slow Stoch showing the Wall Street Big Boys have moved on, knowing they will return and leave, on and on and on

I simply enjoy the theory of the chart and Cramer to paper trade

Couple of charts I find interesting:

Note March, 2007: Jones Soda (http://finance.yahoo.com/echarts?s=JSDA#chart1:symbol=jsda;range=2y;indicat or=ema%2830%29+dividend+rsi+macd%2814,%205,%209%29 +stochasticslow%2814,5%29;charttype=candlestick;cr osshair=cross;ohlcvalues=0;logscale=off;source=und efined)

And who can forget the year long saga of dearly beloved Sirius (http://finance.yahoo.com/echarts?s=siri) to watch how the Big Boys moved in and out via the Slow Stoch indicating they clearly knew stuff as I look back in retrospect

Let me not forget the first stock Cramer back in his first shows of 2005 preached it was a great speculation stock (ala Sirius) as it went down, down, down...And what stock was it? (Click) (http://finance.yahoo.com/echarts?s=cpst#chart1:symbol=cpst;range=5y;indicat or=ema%2830%29+dividend+rsi+macd%2814,%205,%209%29 +stochasticslow%2814,5%29;charttype=candlestick;cr osshair=cross;ohlcvalues=0;logscale=off;source=und efined)






Thanks zyzzyva!! Useful (and interesting) as always!

A couple of questions regarding the Jones Soda chart.....

Lets say I saw the indicators were oversold and bought the stock in March 2006. What was to stop me from selling and taking my profits in the beginning when the indicators were in the overbought category and going down in the beginning of April and few days after it. The lows during these days were certainly low enough to fall below any trendlines I would have drawn.

One can say I should have let it follow the MAs. But at that time all the indicators were overbought or going down. Also, with MAs, its like looking for a needle in the haystack. Chances are you will find the needle but miss the bigger picture!! So, MAs can be drawn for any period for one to get the result one is actually hoping for!!!!! How does one get past that??

So, what would have been a good strategy to sell in this case if you were a position trader - not a day trader?? Thanks!! Comments welcome....

[zyzzyva57]

Talking as a Paper Trader I have found theories work great on paper, but things FOR ME fall apart when I put money on the line

If you emulate (NOT IMITATE) Buffett, then your core money is fairly safe and you do NOT get screwed over--albeit legal--as happened with Sirius or some drug stock (an area Cramer's staff is pure awful) when the FDA walks in out of nowhere and shuts down a Phase III Clinical Drug Trial

The hedge funds, mutual funds, etc may be wrong, but, but, but when you buy and sell zillions of shares of Widget you can create the Reality of Widget, and as a Trader (if this is your lot in life) you best accept Widget's price when the computers of hedge funds and mutual funds sync up and form one massive herd, as the Slow Stoch will show

If you want to Trade on the MA or other metrics, then go here (http://stockcharts.com/def/servlet/SC.scan)for some FREE screens

[aiki14]

Thanks aiki!! Coming from you, that means I am on the right path....Still far away from the goal, but at least on the right path!!

Do you mind sharing with me what tools do you use for TA?? Also, what is the relative importance you give to P/B and P/E ratios?? Thanks!! Others are most welcome to answer these too!

For TA I use Candlesticks, 9,50, 89,200 MA's, Bollinger bands, OBV, Slow Stoch's, and Volume. I also keep RSI14 and RSI2, MFI and ADX (with DI+ and DI-) on my screen.

I give a fair amount of value to P/B and P/E in absolute terms but more to their relationship with the industry, sector and overall market. I put a great deal of value in PEG 5yr expected, and see how the company is doing versus the previous estimates. I want to see high ROA and ROE and positive trends, they are the best measure of management effectiveness. Profit and Operating margin and the trends of both are also key values. Cash position and Debt/equity are also worth noting. And of course insider and institutional holdings and short positions as a percentage of float are also worthy of noting.

[none9999]

For TA I use Candlesticks, 9,50, 89,200 MA's, Bollinger bands, OBV, Slow Stoch's, and Volume. I also keep RSI14 and RSI2, MFI and ADX (with DI+ and DI-) on my screen.

I give a fair amount of value to P/B and P/E in absolute terms but more to their relationship with the industry, sector and overall market. I put a great deal of value in PEG 5yr expected, and see how the company is doing versus the previous estimates. I want to see high ROA and ROE and positive trends, they are the best measure of management effectiveness. Profit and Operating margin and the trends of both are also key values. Cash position and Debt/equity are also worth noting. And of course insider and institutional holdings and short positions as a percentage of float are also worthy of noting.

Thanks aiki!! I have been wanting to pick your brains for a long time!!!!!!

Here are some more questions. I hope you dont mind....

So, with all the technical indicators you have mentioned, do they all have to be perfectly aligned in order for you to consider a stock "a buy" ? Or do you give more importance to some indicators than others? This question becomes important to newbies like me because you can read all the books you want but there is no substitute to experience.

Is there an early warning indicator that warns you that this stock might become a buy soon?? Here's my take from what I have studies....I would look at the OBV to give me the earliest signal. And then +DI and -DI starting to show divergence. Hopefully, there would be a candlestick bottom reversal pattern with a strong volume. Then I would wait for a confirmation the next day and buy the stock based on 15 minute stochastics. At this point, I would expect the MAs to be below the price as there has just been a reversal and act as support. Obviously, if the stock was already on an uptrend, the same doesnt hold true about MAs. Then I would see if a bullish crossover is expected anytime soon and if it looks on the cards, I would jump in. Am I remotely right???

For the sell part, I am not that sure. I am learning that selling is a lot tougher than buying!!!! But one thing that I have learnt from my rookie year mistakes, I will always keep a mental stop loss that I would adhere to strictly!! That also means no averaging down!!!! Though that doesnt agree with the value theory.....there i go confusing myself again. Oh well, Thanks!!

[aiki14]

Thanks aiki!! I have been wanting to pick your brains for a long time!!!!!!

Here are some more questions. I hope you dont mind....

So, with all the technical indicators you have mentioned, do they all have to be perfectly aligned in order for you to consider a stock "a buy" ? Or do you give more importance to some indicators than others? This question becomes important to newbies like me because you can read all the books you want but there is no substitute to experience.

Is there an early warning indicator that warns you that this stock might become a buy soon?? Here's my take from what I have studies....I would look at the OBV to give me the earliest signal. And then +DI and -DI starting to show divergence. Hopefully, there would be a candlestick bottom reversal pattern with a strong volume. Then I would wait for a confirmation the next day and buy the stock based on 15 minute stochastics. At this point, I would expect the MAs to be below the price as there has just been a reversal and act as support. Obviously, if the stock was already on an uptrend, the same doesnt hold true about MAs. Then I would see if a bullish crossover is expected anytime soon and if it looks on the cards, I would jump in. Am I remotely right???

For the sell part, I am not that sure. I am learning that selling is a lot tougher than buying!!!! But one thing that I have learnt from my rookie year mistakes, I will always keep a mental stop loss that I would adhere to strictly!! That also means no averaging down!!!! Though that doesnt agree with the value theory.....there i go confusing myself again. Oh well, Thanks!!

All the indicators do not have to line up before I'll make a move, however the more indicators the stronger my conviction. And the more uncorrelated indicators the better.
I do give some indicators more weight than others. I believe in volume being the most important of all since volume confirms price. I use a stochastic cross as my base trigger and look to incoming absolute volume and OBV to confirm. I use MA's to screen stocks and provide entry and exit points as well.
You're methodology seems sound to me, but remember no one way is "The Way" and sometimes things need to be simplified, or modified to fit the overall market conditions, and the timeframe of the trade you're looking at. I don't use OBV as a first order indicator but as a confirming indicator since as I said, I believe volume confirms price. You will see price moves before volume comes in. Without going into a candle tutorial which I am unqualified to give I do like the basic reversal patterns for starting a position, bullish and bearish engulfing, doji etc, and look to confirming candles and my other indicators to add to the position.
Selling is much more difficult than buying. It's the "In the Game" mentality, we feel that as long as the position is open we are in the game and don't have a loss on our record. The facts of life are that holding a losing position is a better way to have a bigger loss than to get back to a winning position. I have said many times here on the forum that I want my tombstone to read "He knew when to get out". I believe that will ensure I have left my family with the largest inheritance. I do average in on occasion, but much more frequently I average up.

[wallstreetsedge]

And I am just wondering how important is it to buy stocks with strong fundamentals in swing trading? I was thinking about adding the CANSLIM approach along with technicals....but that I am guessing might be a question for another thread.

honestly, i don't buy on fundamentals unless i'm looking at longer term trades. even when it comes to fundamentals, stocks can take huge beatings... look at CROX, NTRI, HLYS, BSC, WLP, WCG, UNH, NFI, C, MBI, WNR

when i play longer term holds, i look for stocks which i can hold onto for years to come... for 2008, i have a playbook on my site i put up in january, it included stocks such as WU, IBM, INTC, USO

for swing trading, i would suggest...
daily chart
candlesticks
volume
bollinger bands
rsi 2

[none9999]

Thank you both aiki and WSE!! Its amazing how helpful you guys are! I just hope I can make make good use of it.

WSE, I was hoping by first looking at the fundamentals, I would just tilt the odds a little in my favor.....And did you forget putting in MAs in the list of indicators?? Thanks!!

[jmarkd59]

YES, thank you aiki and WSE.