MACD entry strategy

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MACD entry strategy

This is one of best strategies for new traders. You can actually use it in different ways to determine trend and also reversals and of course signals for trading. Best time frames to use it are short but you can apply it to any time frame. The strategy itself deserves that their author is also written, in this case this is James Ayetemimowa. As we said, it is simple strategy that uses MACD. Good thing is that it follows the trend and uses more then one indicator to determine entry point which is great for binary options trading.

STRATEGY SETUP

INDICATORS TO USE ONA CHART:
– 50 SMA (GREEN)
– 100 SMA (RED)
– MACD (DEFAULT SETTINGS – 12, 26, 9)

TIME FRAME:
– 5 MIN or anything else you like

HOW IT WORKS:

As you can see the setup itself is simple and it is based on a 5 minute time frame so the signals come regulary. With the two moving averages you determine the trend, type of trade. These two SMAs determine your position, when the 50 bar SMA is above the 100 bar SMA means that the trend is bullish so it goes up. When the short 50 bar SMA is below the 100 bar SMA means that trend bearish and it will go down. As you can see, you only trade when this happens, you do not anticipate and trade before it crosses. You will see the signal will be made when the MACD is overbough or it will be oversold, that is when it will crossover and at the same time the price will go past the SMA. This means that when trend is downfall you will have to wait for price to correct itself above moving average. So when this event happens you will get signal when MACD oscillator is on the overbough side and of course makes bearish cross over. You can predict this cross over with MACD histogram. Check also the picture and you will see what i mean.

FINALE

This is a very well thought strategy even for beginners as we said but that does not mean it is not good for expirienced traders aswell. You can use this strategy for every asset you wish to trade on any time frame basicly. But please have in mind money management at all times. As you see it also does not need to check multiple time frames but it will not hurt if you do your analysis since you can only benefit from that. Even though it is simple strategy it can be very well trusted since it give you the right trend and momentum from which you can see signals to use for binary options trading.

How to Enter Trades using a MACD Crossover

Many traders look for opportunities to trade during volatile market conditions and while these periods offer great opportunities, the importance of timing cannot be ignored.

The aim of this article is to give traders a better understanding of the MACD crossover and to demonstrate how it can be used in Forex trading.

The MACD Crossover: What is it?

The Moving Average Convergence/Divergence ( MACD ) is a technical indicator which uses the difference between two exponential moving averages to determine the momentum and the direction of the market. The MACD crossover occurs when the MACD line and the signal line intercept, often indicating a change in the momentum/trend of the market. The MACD is seen as an effective indicator , especially in trending markets.

Components of the MACD:

  • The MACD line : The MACD line (blue line) is the difference between the two exponential moving averages (usually the last 12 and 26 days or weeks) and is usually referred to as the faster line.
  • Signal line : The signal line is usually a 9 period exponentially smoothed average of the MACD line and will be referred to as the slower line.
  • Zero line : The MACD lines fluctuate above and below a zero line, giving the MACD the qualities of an oscillator.
  • Histogram : The histogram consists of vertical lines that show the spread between the two MACD lines.

Using the MACD Crossover in a Forex Trade

3 helpful ways to use the MACD crossover in a forex trade

  1. MACD crossover as an entry trigger
  2. Using divergence to determine momentum with crossover as confirmation
  3. MACD crossover to filter signals

1. MACD crossover as an entry trigger

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Having a strong entry strategy can increase the probability of success by confirming the direction of the trend before entering a trade.

In the case of the MACD crossover, the most widely used entry signal is when the MACD line crosses over the signal line in the direction of the trend.

A bullish signal is present when the MACD line crosses ABOVE the signal line and is below the zero line. When the crossover takes place, traders may look for confirmation of an upward trend by waiting for the MACD line to cross over the zero line before opening a long position.

Likewise, a bearish signal is present when the MACD line crosses BELOW the signal line and is above the zero line. Once again, confirmation can be seen when the MACD line crosses below the zero line.

2. Using divergence to determine trend with crossover as confirmation

In periods of high volatility, or strong trending markets, divergence can be extremely helpful when looking at the momentum of the trend.

Divergence can be defined as the separation of price action from an indicator. An example of divergence can be seen on the GBP/NZD 2 hour chart below where the market shows a series of new highs on the price chart but the MACD indicator shows lower highs. Divergence is often a symptom of reversal as it suggests that the trend is beginning to lose momentum.

When this occurs, traders may use the next crossover as confirmation of a market correction/reversal before entering a position in the opposite direction.

3. Using the MACD crossover to filter signals in direction of trend

Traders who believe that ‘ the trend is your friend’ may find the MACD crossover to be a useful tool when looking to filter signals in the direction of trend.

To identify an upward trend, a trader can look at crossovers that occur when the price chart is showing higher highs and higher lows. Another way to identify an upward trend would be to look at the MACD line (the blue line) relative to the zero line. When the MACD line is above the zero line, this means that the trend is up. Traders who follow the trend will only look for buy opportunities when the trend is up. The opposite criteria would apply to traders looking for opportunities to sell.

Using The MACD Indicator And Best Settings

Last updated on April 4th, 2020

The MACD ( moving average convergence divergence ) indicator is a technical analysis tool that was designed by Gerald Appel in the late 1970s.

It is used as a trend direction indicator as well as a measure of the momentum in the market. Traders will also use it to confirm a trade when combined with other strategies as well as a means to enter a trading position.

MACD Settings

The MACD default settings are: 12, 26, 9 which represents the values for:

  • The lookback periods for the fast line (12)
  • The lookback period for the slow line (26)
  • Signal EMA (9)

These settings can be easily changed to another popular set of parameters, 8, 17, 9 where:

  • The fast line is set to 8
  • The slow line is set to 17
  • The signal line remains at 9

As with any trading indicator, I always start with the input parameters that were set out by the developer and later determine if I will change the values.

This leads us to how the macd calculates its output:

  1. The 12 period EMA calculates a number for this period
  2. The 26 EMA calculates a number for this period
  3. Subtraction of the 26 EMA result from the 12 EMA result
  4. A 9 period EMA is calculated from 26 EMA – 12 EMA

MACD Settings For Intraday Trading

As with any indicator, you can change the input values depending on your needs.

Intraday traders may want a faster indicator to cut down on lag time due to their short term trading style. The search for the best settings for any indicator is a trap many of us have fallen into at least once in our trading.

The reason I always start with the default settings is that there are so many different combinations that can be used for any indicator. When you look at the MACD values, you have 3 that can be altered.

The question should always be “will it make a difference”.

You must test any changes you make to ensure it actually adds to your trading plan.

That said, one very popular combination of the MACD is 3, 10, 16 which is a variation of the 3/10 oscillator. I highly suggest that before you start crunching numbers and looking for short term macd settings for faster signals, you know exactly how the MACD works and determine if it will benefit your own trading.

MACD Line and Signal Line

The MACD line is faster than the signal line and is the result of the difference between the fast and slow-moving averages. Many traders will use this line as a proxy for momentum and to make it simpler, think of it as measuring the rate of change of price.

The signal line in the MACD is slower due to it’s setting and traders will often use that as a trend determination tool either using multiple time frames or simply one trading chart.

Knowing that we measure trend and momentum, you may already see how we can use the MACD to actually trade with when we use both the MACD line and the signal line to alert us to a possible change in the market we are trading. The 2 line cross can be a very powerful indicator of trading potential in the market.

What Is The Best MACD Indicator for MT4?

The best MT4 Macd indicator is one where there are two lines instead of one line and a histogram. You can download the traditional MACD for MT4 and MT5 from here.

Notice how using the traditional MACD for MT4/MT5, is much easier to use. You can toggle off the histogram as well.

MACD Trading Strategy

We have set up the indicator on our chart and are going to use the standard settings as previously discussed and learn how to read the macd.

When we want to determine trend direction via the MACD, we look where the MACD line is in relation to the signal line. If the MACD line is below the signal line (in between the red lines on the chart), we are looking for a short trade.

If we see where the MACD line is above the signal line (between the green lines), this would indicate a market in an uptrend and you would be bullish on any trading setup.

    • If the MACD is above the 0 line, we can look to buy crosses of the 2 lines
    • Once price is below the 0 line, we would look to sell the crossing of the fast and slow line
  • Trade exits would be a crossing in the opposite direction of the two lines.

This is one reason that multiple time frame trading is suitable for this trading indicator. You’d simply look to short rallies during a MACD downtrend and buy pullbacks during an uptrend.

MACD Entry and Exit Signals

Some traders will use a macd signal line crossover to buy or sell the market.

You may want to consider other variables such as price structure, multiple time frame considerations and price action in conjunction with trading a simple cross.

Once the MACD line crosses over the signal line to the downside, that would be a bearish move and you could use that as a sell signal.

Conversely, if the MACD line crosses to the upside, you would be bullish and can use that as a buy signal.

MACD Zero Line Trading Strategy

Another way we can use this indicator is to take advantage of the zero line and the fast line as a means of trade entry. Again, keep in mind the lagging nature of all indicators with this trading method and highly consider using multiple time frames for your trading.

You can see the change in trend when during the moving average crossover so we know we are looking for short trades. Once the fast line crosses the zero line, this would be a trade entry.

You can see how mechanical this is but also gets you in very late in the move.

You will see an inset box on this graphic. That is the daily chart and the red line indicates where, after the weekly trend turns down, you would enter on the daily chart using the zero line cross method.

That black line is where you’d enter on the weekly chart two months later.

Fast Line Hook Trade Entry

We spoke about the fast line being a proxy for momentum and there may be times where you will not want to wait for a complete crossover of the MACD to take a trade. I want to draw your attention to the black round circle at the top of the chart.

Here we see a pin bar has formed after a run-up in price. Also, notice the separation in the MACD indicator as price approaches this region (in the same region of previous resistance not seen on this chart) showing decent momentum in this market.

We see the separation decreasing as price slows down and then explodes to the upside but closes on its open as seen on the pin bar. This is a bearish sign.

Bring your eyes to the fast line of the MACD and you can see it hook to the downside. Given the context of price action and structure, you could gain early entry into a possible reversal.

Depending on the context of the chart, you can use the fast line hook as a buy signal or a sell signal. These can be used to enter the market or as a profit-taking indicator.

Does it matter? This is a weekly chart and you would have enter 5-6 bar earlier and been up over 120 pips before the breakdown.

MACD Combinations

My favorite combination is the MACD + Keltner channels.

  • Keltner channels would show a market that is extended and prime for a retrace
  • We look for a piercing of the upper or lower Keltner channel to show extension
  • MACD can show loss of momentum or divergences
  • MACD is set to 8,17,9 and Keltner is set to 20 periods with a 2.25 multiplier

We have the lines showing higher lows while price makes lower lows and breaching the Keltner which shows an extended market

Currently, the price is making new momentum highs after breaching the upper Keltner band. This alerts us to a possible pullback trading situation.

Trading With The MACD – Summary

With this indicator, we have a very useful technical analysis tool. It has quite a few uses and we covered:

  • How to determine the trend using the 2 line cross
  • How to read momentum using the fast line
  • Trade entry using a fast line hook
  • Trade entry using a zero line cross
  • The benefits of multiple time frame analysis

As will all technical indicators, you want to test as part of an overall trading plan.

Also, be aware of the lag time using this indicator although for some traders it will be an advantage as you are not picking tops and bottoms.

You may also want to experiment, as with any moving averages, consolidation plays when the 2 lines of the MACD converge. When this happens, price is usually in a range setting up a possible break out trade.

Test, backtest, and forward test and you may find the MACD a valuable part of your trading process.

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