But, at the same time, which is even more important, it maximizes the potential profit as well. This strategy is included in our complete list of what we believe are the best trading strategies compiled on the internet. Our team here at Trading Strategy Guides. We have developed this trend following strategy because we felt the need to show the world how to properly use the MACD indicator and to show how accurate this tool can be in forecasting market turning points. Put it simple, a trend following indicator helps you to determine the overall direction of the market, be it up bullish or down bearish.
While a momentum indicator seeks to determine the speed of the trend. Put them together and you have the perfect combination for a trend following strategy. A picture is worth a thousand words, so here is how the classical MACD indicator looks like on a chart:. The MACD manipulates its moving averages in a rather clever way and can signal changes in trend much closer to when they actually occur. Please have a look at the chart example below to see the power of the MACD indicator. They are calculated using a formula which adds greater weight to the most recent price data.
You can find a version for the strategy here on Forex Factory: Wait for the MACD lines to develop a higher high followed by a lower high swing point.
This is an unorthodox approach to technical analysis, but we at Trading Strategy Guides. The first rule of thumb to recognize a swing high on the MACD indicator is to look at the price chart if the respective currency pair is doing a swing high the same as the MACD indicator does.
A higher high is the highest swing price point on a chart and must be higher than all previous swing high points. While a lower high happens when the swing point is lower than the previous swing high point. See below, how you chart should look like after you correctly identified the swing points on the MACD indicator and connected them through a trendline. At this point, we really ignored the histogram because much of the information contained by the histogram is already showing up by the moving averages.
Look at the price action now and compare it to our MACD trendline we drew early. We can clearly notice that the MACD contains the price action much better and reflects the trend much clear. Wait for the MACD line to break above the trendline. Entry at the market price as soon as the MACD line breaks above. However, if trading would be that easy we would all be millionaires, right?
This is a clever way to filter out the false signals, but you have to be equipped with the right mindset and have patience until all the piece of the puzzle come together.
But if you use the MACD indicator along with other criterias such what this strategy tells you to do, you will find great trade entries on a consistent basis. Use Protective Stop Loss Order. Place the SL below the most recent swing low.
Now, that you already know how to enter a trade at this point you have to learn how to manage risk and where to place the SL. After all, a trader is basically a risk manager. You want to place your stop loss below the most recent low, like in the figure below. But make sure you add a buffer of pips away from the low, to protect yourself from possible false breakouts. The MACD Trend Following Strategy triggered the buy signal right at the start of a new trend and what is most important the timing is more than perfection.
Knowing when to take profit is as important as knowing when to enter a trade. Use the exact same rules but in reverse for a sell trade. Our team at Trading Strategy Guides. Grab the Free PDF Strategy Report that includes other helpful information like more details, more chart images, and many other examples of this strategy in action! What are your thoughts on this strategy?
We love using to MACD indicator to help us trade the market. Do you use this great indicator? We also added that link to the strategy now so that if you need this you can go over to Forex Factory and Grab it. A picture is worth a thousand words, so here is how the classical MACD indicator looks like on a chart: So, how does it work?
What about the indicator setting? The preferred settings for the MACD indicator are the default settings. Now, before we go any further, please take a piece of paper and a pen and note down the rules. Connect the MACD line swing points that you have identified in Step 1 with a trendline This step is quite simple, right? Place the SL below the most recent swing low Now, that you already know how to enter a trade at this point you have to learn how to manage risk and where to place the SL.
Now, what this has to do with the SL? Take Profit when the MACD crossover happens in the opposite direction of our entry Knowing when to take profit is as important as knowing when to enter a trade. If you have any questions about this strategy, please ask us in the comments below!More...