Currency trading strategy based on MACD, RSI and SMA

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Reliable and Effective FX Trading Strategy Based on MACD, RSI and SMA.

Experienced traders know that different market conditions require different trading approaches. Sometimes it happens that the technical analysis does not work, especially when some crucial or unexpected event shakes out the fundamental part of the analysis and traders’ sentiment is getting driven by psychological factors like fear or greed. But those examples are quite rare and exclusive hence focusing on most often cases would be correct if we talked about seeking a multi-purpose FX trading strategy applicable for many different market situations. It’s also understood that it has to be based on popular and effective technical indicators which deserved to be widely used amid their performance in different conditions. The number of fake signals coming from those indicators has to be extremely low in order to maintain the highest level of efficiency, therefore, the frequency of entries will be quite low as well. If we took the mixture of requirements described above, then one of the best choices would be the FX trading strategy based on MACD, RSI and SMA.

Dozens of articles were written about those three indicators, there is no reason to focus on them in details. We would just shortly describe their main features which have been discovered during the practical usage in real-time trading. The Moving Average of Convergence and Divergence is a rather complicated technical indicator. It’s rather slow in terms of reaction for every single fluctuation of the price but that’s the biggest advantage. MACD is a trend indicator meaning that it does not show exact entry/exit levels in sideways ranges. At the same time, it shows the momentum, direction of a trend and, which is probably the main advantage, it perfectly shows divergences when the current trend is getting exhausted and chances for a reversal are getting higher. We recommend using default settings for MACD indicator as they proved their efficiency for many assets and timeframes.

The Relative Strength Index is a fast oscillator, the most popular among other similar indicators. It points to overbought/oversold levels of a price, confirms or denies divergence from the MACD slow indicator and RSI signals when the current market conditions are changed in the scope of bullish or bearish sentiment. The RSI’s level of 50% is a kind of litmus test for the current trend, showing whether the tendency is going to continue or would the price action change to the completely opposite direction. The default period of RSI oscillator is 14 bars (days or hours, depending on the timeframe) but we recommend changing it to 13 bars for slow-moving currency pairs and assets (like EUR/USD or GOLD), and to 21 bars for volatile financial instruments (GBP/JPY or USD/ZAR).

The Simple Moving Average is an additional technical tool in this FX trading strategy but it’s extremely helpful in determining exact entry/exit points for trading positions. Most of the technical analysts use round-figure periods for SMA (20-, 50-, 100-bars) but we prefer using numbers from the Fibonacci row (21-, 34-, 89-bars). Anyway, the combination of settings for any trading system depends on several factors like the asset to trade on, money management rules and the general trading strategy which is always an individual choice. FinmaxFX offers the widest range of technical indicators in its advanced charting tool, in-depth technical analysis outlooks and online support. The best approach for traders would be to develop a personal trading strategy based on individual financial goals and targets, the volume of trading account and risk-management rules. FinmaxFX clients get a personal account manager to consult and chose the optimal combination of those factors. The broker’s support team consists of experienced traders, therefore, FinmaxFX clients are able to get the deepest consulting possible when it comes to trading in the Forex market.

Once the combination of technical indicators is chosen, it’s time to move forward to assets and timeframes. It’s a well-known fact that the technical analysis works best for financial instruments with higher trading volume rather than for low-volume and volatile assets. The best choice would be EUR/USD for this trading strategy as it’s the most popular currency pair, it has the highest trading volume (60% of the US dollar’s volume-weighted basket is euro) and it’s technically correct (does not have lots of whipsaws, shadows and fake breakouts). Several other currency pairs can also be chosen without losing the efficiency and reliability of the trading system based on MACD, RSI and SMA. For example, USD/CHF and GBP/USD currency pairs are also applicable among other majors, while gold and oil could be considered among commodities. Timeframes range is quite wide: from 1-hour intraday chart to 1-week long-term period. The only thing we would not recommend is trading on shorter timeframes like 5- or 15-minutes as those charts are full of fake trading signals and the strategy’s efficiency would be lowered because of that. Anyway, it’s always better to test the system before using it in the real trading account. FinmaxFX consultants will help traders choosing the hottest and most profitable asset in the Forex market. Let’s move to practical examples.

The 4-hourly chart below shows an example of how this trading system works. There is an obvious and continuous downtrend on EUR/USD which enters into a phase of uncertainty (green line on below the price). Slow MACD starts pointing to a bullish divergence with its lines showing higher lows, while the price keeps charting lower lows. Moreover, the MACD histogram remains in the positive territory (green bars above the 0 level). That’s the first signal to get ready for a reversal. Next, fast RSI has to be monitored. It comes out of the oversold level and charts the series of higher lows, confirming the bullish divergence seen on MACD earlier. Once we get long whipsaw on the 4-hourly candlestick, we open a long position. The profit has to be taken on the test of SMA89, as we can see from the price action that the uptrend is getting exhausted in that range, which puts our current profit at risk. Therefore, it’s better for grabbing your money and run. The overall profit of 100 pips (four-digit quotes) is rather good for such a slow-moving currency pair as EUR/USD, especially in the light of how fast the price bounced off the oversold levels and went back to long-term moving average.

Another example is based on by-trend confirmation. We do not look for a trend reversal here. Let’s imagine we already took some partial profit from the upside movement, or even we missed the reversal pattern for some reasons. We’re looking for good entry level to join the current trend and we see that the price has breached SMA89 clearly, going well above the average price range. The MACD indicator is rather bullish at that moment, both lines are directed North and the histogram is in the positive territory, pointing to a bullish continuation. The RSI oscillator is far from overbought levels, having plenty of room to go up. What happens with EUR/USD is that the pair bounces back to SMA89 support curve, which used to work as the resistance before. The crucial moment is that the RSI stays above the 50% level on that candlestick’s close and the price failed to break through the SMA89 support. We go long on the next candlestick open and we take profit on the second test of the overbought level by RSI. Another 80 pips on EUR/USD with by-trend bounce application of the same three technical indicators working together.

As a conclusion, it’s worth mentioning that the combination of these three technical indicators is widely used in the technical analysis for the FX market. It has lots of practical applications in different market conditions, it works effectively to confirm or deny the recent trend and it shows entry/exit levels for profitable trading both intraday and long-term. At the same time, reading books and making theoretical conclusions is surely useful but that process does not pay bills nor brings profits, unfortunately. The best option to test any trading strategy is to open a real trading account, even the smallest one, and start making real steps in the fascinating journey of the financial markets. FinmaxFX is ready to help, all you need is just sing up on the website.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

20 SMA With RSI Forex Trading Strategy

The 20 SMA with RSI forex trading strategy is also a very simple forex trading strategy which beginner Forex traders can find very easy to use.

Currency Pair: Any

Indicators: RSI (set period settings to 5) & 20 SMA

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WHAT IS THE PURPOSE OF 20 SMA?

The 20 SMA (simple moving average) for identifying and whether the trend is up or down and here’s how:

  • if the price is above the 20 sma, the market is in an uptrend.
  • if the price is below the 20 sma, the market is in a downtrend

WHAT IS THE PURPOSE OF RSI?

Its purpose is to confirm the strength of the trend.

  • you also need to set the 50 RSI level on your chart
  • when the RSI peaks above the 50 level and starts to turn down, it indicates that the uptrend (or minor rally) is weakening and it is a good time to be looking for a sell signal to trade.
  • when the RSI bottoms below the 50 level and starts to head up, it indicates that the downtrend(or minor pullback) may be weakening and it may be a good time to look for a trade entry signal to buy

TRADING RULES OF THE 20 SMA WITH RSI FOREX TRADING STRATEGY

Refer to the chart below for the trading rules:

Selling Rules:

  1. Price has to be below the 20 SMA-indicating a downtrend.
  2. Wait for price to rally back up to touch the 20SMA line.
  3. Once 20SMA line is touched, look down to see if the 5 period RSI has peaked above 50 level and has started to turn down-confirming a weakening upward momentum.
  4. Place a sell stop order under the low of the candlestick (after it closes). This candlestick should coincide with the RSI starting to turn down.
  5. Place Your stop loss above the high of that candlestick.
  6. Your profit target: 3 times what you risked. Another option would be to exit with whatever profit you have when the opposite trading signal is given (which is when a buy signal is given-this can bag you hundreds of pips easily in a nice trending market).

Buying Rules:

  1. Price has to be above the 20 SMA-indicating an uptrend.
  2. Wait for price to pullback down to touch the 20SMA line.
  3. Once 20SMA line is touched, look down to see if the 5 period RSI has bottomed below 50 RSI level and has started to turn up-confirming a weakening downward momentum.
  4. Place a buy stop order above the high of the candlestick (after it closes). This candlestick should coincide with the RSI starting to turn up.
  5. Place Your stop loss below the high of that candlestick.
  6. Your profit target: 3 times what you risked. Another option would be to exit with whatever profit you have when the opposite trading signal is given (which is when a sell signal is given).

DISADVANTAGES OF THE 20SMA WITH RSI FOREX TRADING STRATEGY

  • as with all forex trading strategies based on moving averages, this strategy performs really poorly in flat or ranging markets.
  • sometimes price may not rally or pullback to touch the 20 SMA line until very later on and by that time that price movement would have been already exhausted and the market may be looking to reverse direction.
  • moving averages indicators are lagging indicators-you are waiting for price to come back to a 20 SMA when price may have already made a big move.

ADVANTAGES OF THE 20 SMA WITH RSI FOREX TRADING STRATEGY

  • this is a trend trading strategy and in a good trending market, will work really well which has the potential to make you a lot of profitable pips.
  • the use of forex reversal candlestick patterns would greatly enhance the entry signals so you should learn about how you can incorporate them into this trading strategy.

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MACD Trading Strategies

MACD Trading Strategies

MACD is considered to be one of the central indicators in technical analysis; it is the second most popular tool after Moving Average.

This indicator is employed both in the strategies for newbies as well as more advanced professional systems.

What are the MACD advantages, how can you set it up and make use of it in your trading?

MACD: principle and peculiarities

MACD is an oscillator, although it’s often called a trend indicator or even a “trend oscillator”.

It happens because MACD is based on two moving average indicators applied directly on the chart (they are not displayed in the MACD chart, only their readings are used).

MACD itself is displayed in a separate window under the chart. It looks like a histogram with an auxiliary line. The histogram shows that divergence of two moving averages.

If one of them moves away from the other, the histogram bars become longer; If the moving averages get closer, the bars become shorter.

Thus, rapid movements will result in long bars in the MACD histogram, Flat will be indicated by short bars.

If the histogram is above the zero line, it means that the fast moving average will be rising above the slow one, gradually moving away from it, which indicates an uptrend.

If the bars go below the zero line and the fast-moving average is below the slow one, it’s a downtrend.

The auxiliary line, which sometimes intersects with the histogram in the indicator window, is the moving average that has been calculated based on the MACD histogram readings and not the price chart.

This line is designed to receive additional signals from the indicator. To avoid any confusion, let us call it a “MACD moving average”.

MACD Indicator set up

MACD is among the standard tools of MetaTrader 4 and MetaTrader 5, and the set up is done in just a few clicks.

The easiest way to do that is via the “Indicators” section in the platform’s upper menu:

After that the window with indicator settings will open:

Here you can set the main parameters of the indicator:

  1. Fast and slow MA are the moving averages. They are applied to the chart and provide the data for the histogram. The greater the difference between their periods, the more rapid changes the histogram will show. More often than not, these parameters remain default (unless a specific strategy requires otherwise).
  2. MACD SMA is a parameter of the MACD moving average itself. The higher the parameter, the further away the average will move from the histogram and they will intersect less often.
    This parameter value allows to adjust the accuracy of the signal within a trading strategy: the higher the parameter value, the fewer signals there are.
  3. Next, you need to set the parameter (open, close, candlestick’s highest and lowest values) which will determine the remaining criteria.
  4. Finally, you can fix the minimum and maximum parameters. The histogram will not go above or below them.

Other tabs will allow you to set the colour range, change the timeframe or add levels that are a straight line on an indicator (it’s set to “0” by default).

Additional levels might be required by a certain strategy for tracking the signals. For example, selling of an asset at the intersection of the top level on the chart.

Once the indicator has been set up and applied to the chart, you can start trading.

There are both simple and more complex MACD trading strategies.

To understand the MACD principle, let us look at some of these strategies.

Simple MACD strategy

The simplest MACD strategy does not require any additional indicators. MACD signals alone will be sufficient for determining the entry points.

With this strategy, the orders are opened as follows:

  1. If the MACD histogram crosses the moving average upwards, the buy order will be placed.
  2. If the MACD histogram crosses the moving average downwards, the sell order will be placed.

The recommended stop loss level is set below the minimum level of the candlestick that determines the entry point (when buying) and is above the maximum level when selling.

The take profit should be three times the stop loss or at the closest key price level.

MACD convergence/divergence trading

MACD convergence/divergence signal is one of the strongest ones. Convergence is expressed in approaching of the moving direction of the MACD histogram and the price chart.

It looks like this:

The chart shows how the price movement slowed down after a strong downtrend, reversed and then went down again hitting a fresh low.

At the same time, MACD also shows a local minimum, but it is higher than the previous one.

This signals that the movement is “exhausted” and it’s highly likely that the price will go upwards.

Although it is now shown in the chart itself, the indicator signals in advance. This is exactly what makes it valuable.

Convergence trading is conducted in the following way:

  1. When the indicator “draws” the second minimum above the first one, you need to be ready to buy.
  2. The market entry occurs when the price reverse is confirmed by the break of the upper trend line (resistance).

Divergence differs from convergence in that the lines in the chart and at the top of the histogram do not converge but move in different directions (the chart line goes upwards whereas the line in the indicator window moves down).

In this case, if the price breaks the price channel support line, the sell order will be open.

MACD + МА strategy

To make trading more efficient, you can use other indicators together with MACD.

The best option to complement the MACD oscillator would be a trend indicator.

The most effective and simple one would be МА.

The buy and sell signals will then be as follows:

  1. If the price chart crosses the moving average downward and the histogram intersects with its average in the same direction, the sell order will be open.
  2. If both intersections have an upward direction, the buy order will be open.

There are fewer false entry points because the indicators filter each other’s signals.

Although this system can also result in losses, they are compensated by bigger profits due to the strong trend.

Complex strategy with MA and RSI

The “the more indicators, the better” rule does not always work. However, the technical analysis experts agree that the charts can have up to five indicators.

We will look at the strategy with three indicators: MACD, MA and the RSI oscillator.

In this case, it is quite appropriate to use two oscillators.

While MACD will help determine the order opening direction, RSI will determine the optimum entry points.

It will allow not only to enter the market in the correct trend direction but also take maximum profit.

You can opt not to open the position if the trend started weakening and you missed the chance.

The complex strategy allows to buy under the following conditions:

  1. The price chart intersects MA in the upwards direction.
  2. The MACD histogram crosses the moving average in the same direction.
  3. RSI enters the oversold zone (below 30) and then moves upwards.

If the situation is reversed, the sell orders will open.

In this case, RSI will act as a powerful filter that will prevent late market entry.

At the same time, MA and MACD will be filtering the false entries to the RSI oversold and overbought zones.

Conclusion

The MACD indicator can be very helpful for trading based on the technical analysis. However, it is not very efficient without other tools.

Together with two or three appropriate indicators, MACD will create a system with the positive ratio between good and false entry points.

This will ensure profit for the disciplined traders.

You can test these strategies for free with an AvaTrade demo account.

Trading in the financial markets is associated with high investment risks. To level them out, it is necessary to follow the money management rules and set the stop loss. Traders make all the decisions in the Forex market at their own risk.

We recommend you to visit our trading for beginners section for more articles on how to trade Forex and CFDs.

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