Last week, I posted a video outlining some thoughts on using MACD, the RSI or Stochastic to improve trading strategies.
Two of the ideas discussed in the video involved using these tools to:
- Achieve early entry on some set ups and
- Improve success rates using higher time frame charts
When we post strategy videos we follow them up over the next few weeks with posts covering practical examples of what has been discussed. While it’s useful to look at perfect examples of past set ups, looking at live ones as they succeed or fail can help get a better understanding of how things work and whether a particular strategic approach might be useful to you.
The Set Up
The basic set up in today’s post is an interestingly placed descending triangle in the daily cash corn chart.
MACD and Stochastic on the Weekly Chart
I have put both the slow stochastic and MACD on this weekly chart. As I discuss in the video, the advantage of these 2 tools for this purpose is that they both use a moving average. This allows a clear read of whether momentum is trending up or down.
So we can see that on the weekly chart both MACD and the Stochastic are below their moving average indicating big picture downtrend.
Returning to our triangle set up on the daily chart, the downward momentum on the higher time frame can be used to:
- Create a short bias for this trade i.e. using it as a sell set up but staying out of a buy trade if price breaks through the top of the triangle
- Sell before price breaks through the bottom of the triangle to improve the payoff ratio if the trade is successful
- Set a larger profit target based on the assumption that this triangle forms part of a correction of an ongoing downtrend.
The standard approach to entry strategies with triangles is to enter once price breaks out of the pattern. However, if you have a reasonably reliable directional bias, an alternative approach is to enter once price rejects the triangle support of resistance. This might only be done after the triangle has definitely been confirmed by 2 previous rejections of both the support and the resistance.
Our corn triangle has already made 2 rejections of both the support and resistance so early entry here could be achieved by selling as soon as price makes a trend peak at or very close to the resistance line. As I’m writing this, today’s candle high is still below yesterday’s so a move below yesterday’s low ( see arrow) would leave a trend peak and represent rejection of the triangle resistance. Another likely alternative though is that we push a little higher from here, above yesterday’s peak but still more or less at the triangle resistance line. If this happens, the set up would be triggered by the first close below whatever candle makes the peak.
A standard approach to profit targets with triangles is to project the height of the triangle from the point at which price breaks out. In this case though, the downward momentum of the weekly MACD/Stochastic combined with the swing structure of the downtrend so far, allows us me to assume that we might yet be in for a 5th and final swing lower before this downtrend is over.
Applying this logic, Fibonacci projections of the 5 swing structure have been used to set the profit target. The target is at a Fib cluster that assumes the swing down from “4” to “5” will:
- finish at the 61.8% retracement of the last major upswing and
- be 61.8% of the length of the whole swing down to” 3″
To view the video outlining RSI, MACD and Stochastic strategies Click Here