Forex Strategies

Custom MA-MACD Forex Trading Strategy

June 17, 2019

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Custom MA-MACD Forex Trading Strategy

The market is like the ocean. It has waves that come and go that has different characteristics and sizes. Some waves are big, some are small, some waves come too often, other times the ocean is too quiet, big waves are nowhere to be found. Many people enjoy the waves as it passes under them, lifting up for a bit, then bringing them back down in between the waves’ trough. But there are people who are able to ride the big waves, the surfers, and they are the ones who have the most fun. As traders, we shouldn’t be like the regular folks who’d just rise a fall with the waves, we should learn to ride the big waves. That is where the money is.

So, what am I waves am I talking about in relation to the market? It is the trend. The market is characterized by the coming and going of trends. Sometimes the market is strongly trending it seems like it will never end. Sometimes the market is too volatile it changes directions every now and then. Sometimes, volatility is nowhere to be found and no strong enough trend could be found. Now, you may already be getting my point. It is those who learn to ride the big trend or “waves” who make the most money. The question is how?

Moving Averages and MACD – A Basic Method of Identifying Probable Trends

One of the better ways to identify trend direction is the use of moving averages. When you come to think of it, trending markets is basically a market wherein price is consistently rising or falling. This constant rise or fall in price would cause its average to rise or fall along with it. In the context of a moving average, it will cause it to slope either up or down.

By using a moving average, we could make it visually easier to identify a trend by identifying the location of price in relation to the moving average and the slope of the moving average. If price is above it and the moving average is sloping up, then the market is said to be trending up, if it is the reverse, then it is trending down.

Some take it a bit further by using multiple moving averages and identifying the location of a moving average in relation to another. If a faster moving average is above a slower moving average, then it is identified as an uptrend. Flip it over for the downtrend. This is the concept behind crossover strategies. Traders enter a trade as the faster moving average crosses the slower moving average signaling a probable start of a new trend.

The Moving Average Convergence-Divergence (MACD) also has the same concept. In fact, its plotting is derived from the relation of a faster moving average in relation to another slower moving average. In a way, it shares the same concept with the crossover of moving averages. The difference is that it is plotted in a separate window.

Trading Strategy Concept

Knowing how crossovers of moving averages are used to identify probable new trends, we will be using a custom moving average to identify as a basis for the crossovers. It will be a moving average with multiple lines, which when fanning out would form a rainbow-like stack. Just as the regular crossover strategy, we will buy as the faster moving average crosses over the slower moving average going up. On the other hand, we will be taking short positions as the faster moving average crosses below the slower moving average.

As an additional confirmation, we will also be using the MACD. We will be taking buy signals only when the faster MACD is above the slower MACD. This is also shown through histograms based on whether it is positive of negative. Flip it over for the filter on sell signals.

Indicators:

RainbowMMA_08
RainbowMMA_11
realMACD

Timeframe: any

Currency Pair: any

Trading Session: any

Buy (Long) Trade Setup

Entry

realMACD histograms should be positive
Enter a buy market order as the RainbowMMA_11 crosses above the RainbowMMA_08 indicator

Stop Loss

Set the stop loss below both moving average indicators

Exit

Close the trade as the realMACD histogram crosses below zero

Sell (Short) Trade Setup

Entry

realMACD histograms should be negative
Enter a buy market order as the RainbowMMA_11 crosses below the RainbowMMA_08 indicator

Stop Loss

Set the stop loss above both moving average indicators

Exit

Close the trade as the realMACD histogram crosses above zero

Conclusion

This is a decent moving average crossover strategy using a custom indicator.

By adding the MACD histogram filter, we are able to have a double confirmation with regards to the trend. Some traders prefer to use the lines and add additional filters based on the where the line is located in relation to the zero line. Some prefer to trade before lines cross zero with the argument that price have a greater tendency to go back to its mean. Other traders trade after crossing over the zero-line arguing that it is a confirmation that the trend has started. I tend to lean towards the camp of trading before crossing over the zero line as it allows for more juice to be squeezed. You won’t want to trade as the trend is ending. But to make it a tad simpler, we will use the histogram rule.

Using the MACD histogram reversal as our exit rule also allows us to exit the trade early on the reversal. Usually, the histogram reverses as the MACD is getting overextended and is showing signs of reversing back to the mean. This is more of a conservative approach. Other traders would prefer using the actual reversal of the moving averages as the basis to exit the trade. I find this a little bit too late. Usually this would cause you to be giving back much of the profits.

Like most crossover strategies, this strategy is excellent for catching trends during a trending market. However, it is not the best strategy to use during a low volatility ranging market. Remember, we are here to ride the big waves, not just bob up and down on the small waves.