Using a Forex Moving Average Convergence Divergence Trading Strategy
8 months ago forexsimulation 0
MACD is a popular momentum indicator that follows and captures trends to show the relationship of two (MAs) Moving Averages of prices. Created in the 1970s by Gerald Appel, MACD is usually calculated by minusing the 26-day EMA from a 12-day EMA (Exponential Moving Average). These MAs use the closing prices of the period being measured to calculate their values.
A signal line is plotted on top of the MACD to represent a 9-day EMA of the indicator. The signal line is a default setting that marks triggers for buy or sell signals. MACD is one of the most popular trend-following indicators that seem to withstand the test of time.
When the indicator moves above the 9-day EMA, a bullish signal is generated. If it moves below the 9-day signal, a sell signal is generated. When the MACD appears to be above the 9-day EMA, the histogram will appear positive and negative if it appears below it.
The histogram also grows more prominent when the prices rise and contracts if the price movement decelerates. The reverse happens when the prices are falling. Forex traders rely on the MACD indicator die to the histogram because it effectively responds to price movement speed. Traders use it to gauge the price movement speed before they determine what direction the trend is taking.
Luckily, you don’t need to download the indicator separately because it comes built into the MT4 (MetaTrader 4) platform. With the proper settings for MACD day trading, you will start realizing new and different forex trading strategies.
Using MACD indicator to trade divergence
Forex traders use MACD indicators to trade divergence. The MACD histogram indicates divergence between the price and momentum, unlike most common setups that find chart points where prices will make a new swing low or a new swing high.
However, the divergence trade tends to fail more times than it prevails, making it a bit inaccurate. Prices have several final bursts, either up or down from time to time which triggers stops, forcing traders to opt out of a position before the move even makes a sustained turn to become a profitable trade.
Forex traders lose with this setup because they tend to enter a trade on a MACD indicator signal, only to exist based on the price movement. Hence, the MACD histogram is a lot like the trading version of mixing oranges and apples because it is a derivative of the price but isn’t the price itself.
How to use MACD histogram for entry and exit
You can use the MACD histogram for forex trade entry and exit signals to resolve the entry and exit inconsistencies. All you need to do is take a short position at the initial divergence point when trading negative divergence and using the price movement to set the stop at the nearest swing high.
This will help you stop out of a trade only when the high of the histogram moves above the previous swing high, which would indicate an acceleration of the momentum and that you are wrong on the trade.
However, if the MACD indicator fails to generate a new swing high, you can add to your initial position and achieve a higher average price. If you are a currency forex trader, you are better positioned to leverage this strategy. You will gain more considerable potential gains if the price reverses, placing you in a more prominent position.
You can implement this strategy in forex trading with any position size without worrying about the influencing price. Hence, to effectively use this strategy, you need to average up whenever the prices temporarily move against you.
When the MACD histogram shows divergence to indicate the possibility of the momentum winning or the price turning soon, you need to be keen enough to call the bluff between the strength of the price action and the readings indicating weakness.
Trading is not a black and white game. If you agree on specific rules blindly, like never adding to a loss, you will successfully break and achieve extraordinary profits. With the MACD histogram, you can trade the indicator rather than the price. By applying this method to your forex market will allow you to scale up on your positions.