This forex trading strategy is designed around the MACD Indicator.
If you don’t know much about the MACD indicator, here are some basics of it:
- MACD is used as a trend or momentum indicator
- as a momentum indicator, it responds to the speed of price move
- being a trend indicator, traders use MACD to determine trend direction
- also, the MACD histogram can be used to spot MACD Divergence and this strategy is about how to trade the MACD divergence.
Currency Pair: Any
Forex Indicators: MACD with setting, 12, 26, 9
(1) Watch for the price making new swing highs or swing lows.
(2) Next thing you do is to draw a trendline connecting the two swing highs or swing lows
(3) Then scan the MACD histogram if you can spot a divergence.
(4) For a short entry: If you spot divergence, wait for the present candlestick to close then place your sell stop order just under the low of that candlestick
(5) For a long entry: wait for the present candlestick to close and then place your buy stop order just above the high of the candlestick
(6) For Long Entry Place your stop loss 5-20 pips below the low of the candlestick and the exact opposite for short trades: place 5-20pips above the high of the candlestick.
(7) Take Profit Targets Options:
- 3 times the amount you risked.
- 3 times the distance from the trough(pullback/retracement) to the new swing high (for a short entry) and opposite for long entry.
- you can also have the option of using Fibonacci to calculate profit targets
How To Use Reversal Candlesticks For Trade Entry Confirmation
The use of reversal candlesticks may become very handy when used as confirmation for entries with the MACD forex strategy.
For Short Entries:
the reversal candlesticks to watch for are: dojis, inside bar, dark cloud, shooting star
For Long Entries: again watch for the dojis, inside bar, hammer, piercing line.
Notice in the short trade setup on the chart below, an inside bar forms right after the new swing high was formed(by the green candlestick) but in which the MACD histogram showed a new swing low indicating a potential decreasing momentum.
The formation of this inside bar reversal candlestick gave the added confirmation to take this short trade.
And here is the result of the trade setup above:
Disadvantages of the MACD divergence forex trading strategy
- MACD is a lagging indicator, which simply means that there will be times when the price has moved a long way before MACD indicator shows it.
- MACD Divergence may not be very accurate and the reason being that prices generally have a tendency to burst up or down that knocks out your stop-loss orders forcing you out of a trade before it either falls or goes up and this sustained price move may have given you a good profit but you are out of that trade.
- It’s very hard to spot the MACD Divergence setup when its happening and this may be true for new forex traders but even experienced traders would find this a bit complicated in some ways.
- Trading with the MACD system goes against what the trader is seeing in reality.
What does this mean? Well, on his charts he will (for example) see the price is moving up in an uptrend but the divergence is telling him he should press the sell button.
How To Trade Regular & Hidden Divergences - Divergence Trading Explained
This causes a lot of confusion: should he pull the trigger or not?
The advantages of the macd divergence forex trading strategy
- If the trading setup works perfectly, you have the potential to be on a trade at the very right time meaning you would have entered a short trade at the very top or a long trade at the very bottom of a swing.
Essentially sell at the very top and but at the very bottom.
- The use of reversal candlesticks may be used as a trading confirmation and here’s how: after a divergence trading signal is given, just wait for a reversal candlestick to form and then enter your order to go long or short.
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