Trading with MACD – Simple Effective Strategies Explained

0 MACD & Momentum Forex Strategy. The MACD & Momentum forex strategy enables traders to quickly buy and sell pairs in trending markets at a good price with the help of the Momentum and MACD indicator.

Trend lines should always be present on your trading charts. It appears to me you're doing everything right, just a bit too early.

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0 MACD & Momentum Forex Strategy. The MACD & Momentum forex strategy enables traders to quickly buy and sell pairs in trending markets at a good price with the help of the Momentum and MACD indicator.

The picture below will illustrate in more detail: Created by James Stanley. The signal line is simply a moving average built on the value of the MACD line. By default, this value is commonly set at 9 periods. As you can see from the above graphic, some of these MACD signals would have worked out beautifully, while others leave something to be desired. This highlights the reason that traders will often want to look at other indicators or mechanisms of deciding which signals to take or which to ignore.

But, an alternative for traders is to simply use different inputs. The default MACD inputs of 12, 26, and 9 are the more common settings for the indicator. The fast MA is listed first, followed by the slow MA, followed by the input of the signal line. Traders looking to take signals solely from MACD, without any additional indicators to assist in grading trends or momentum are often better served by slowing down the indicator by using longer-period moving averages in the inputs.

A common set of inputs to accomplish this goal is the inputs of 21, 55 periods. The chart below will show the difference between the default of 12, 26, and 9 above with the inputs of 21, 55, and 9 below.

Notice that the MACD indicator below gives fewer signals, with the goal of each signal being more reliable. What you Need to Know about Overbought and Oversold.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Take a free trading course with IG Academy. Our interactive online courses help you develop the skills of trading from the ground up. Develop your trading knowledge with our expert-led webinars and in-person seminars on a huge range of topics. A demo account is intended to familiarize you with the tools and features of our trading platforms and to facilitate the testing of trading strategies in a risk-free environment.

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Price action and Macro. Please enter valid email. Phone Number Please fill out this field. As you see, the price creates higher highs, while the tops of the MACD indicator are decreasing blue. The two MACD lines cross afterwards and the price drops.

Then we see four more price swings related with bullish and bearish MACD crossovers. Every time the two lines cross we see a price swing in the direction of the crossover. In this case, the price decreases after a bearish MACD crossover. However, 7 periods later we see a potential oversold MACD signal. The MACD line gains a significant bearish distance from the signal line.

This implies that the Forex pair may be oversold and ready for a bounce. As you see, the price increases afterwards. Keeping in mind the six technical signals we discussed above we can divide the trade entry rules of the MACD indicator with the two types: When you open a trade using a MACD analysis, you will want to protect your position with a stop loss order.

To place your stop loss order effectively, you should refer to the chart for previous price action swing points. If you are opening a long trade, you could place your stop loss below a previous bottom on the chart. If you trade short, then you could place your stop loss order above a previous top. If the price action creates a lower low on a long trade, or higher high on a short trade, your position will be closed automatically.

One way to exit a MACD trade is to hold until you receive an opposite signal. So a contrary MACD signal would be your signal to close out your trade. However, there are many other ways to manage your trade based on your personal preferences. The image shows a couple of trades on the chart that incorporates the MACD lines and histogram. The first trading signal comes when the price action creates an Inverted Hammer candle pattern after a decrease. A few periods later we see that the MACD lines create a bullish crossover.

These are two matching bullish signals, which can be a sufficient premise for a long trade. A stop loss order should be placed below the bottom created at the moment of the reversal , as shown on the image. This would have been an optimal exit point. After the creation of the last high, we see a reversing move, followed by a trend line breakout. At the same time, the MACD lines cross in bearish direction.

These are two separate exit signals, which unfortunately come a bit late. If you closed the trade here, the trade would still have been slightly profitable. One thing to note is that the trend line breakout and the bearish MACD crossover generate matching short signals on the chart, meaning that this could provide for a short trade opportunity. The price starts decreasing afterwards with the creation of a new bearish trend. The MACD lines decrease as well.

After a 6-day decrease, the two MACD lines create a higher bottom, while the price action is still decreasing. This creates a bullish MACD divergence on the chart. As such, you should exit the trade when the MACD lines cross upwards. This happens just a couple periods later, confirming the Bullish Divergence pattern. Divergence trading is one of the most popular and effective Forex strategies.

However, one downside with Divergence is that prices can stay in a divergent formation for quite some time without reversing, and it can sometimes be difficult to know when to enter this type of counter trend setup. Keeping a close eye on emerging price action patterns can be helpful in trading divergences.

The image depicts how we might trade a MACD divergence pattern. The image begins with a sharp price drop. Suddenly the decrease slows down. At the same time, the MACD not only slows down, but it starts increasing, creating a bullish divergence.

A bullish MACD crossover appears afterwards. You could have opened the trade based on this signal. If you did, you would likely have gotten stopped out on this first entry. Shortly after, we get a Hammer Reversal candle , which provides additional confirmation of the bullish scenario.