MACD and AMA Forex MT4 Indicators Based Strategy

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MACD and AMA MT4 Indicators Based Forex Trading Strategy

There are schools of thought among forex traders who despise the use of MT4 indicators. Their argument is that indicators are lagging and thus a trader’s reaction to what the market is doing is already a little too late. Instead, they prefer the use of price action and nothing else. To them, price is king. To some extent, they are right. Indicators do lag since indicators are derived from what price has already done. However, even candlesticks are lagging. A candle’s high, low, open or close is determined right after the candle closes. So, whether you trade based on candlesticks, price action, or indicators, you are still on the same boat, making a trading decision based on what price has already done.

However, there are other MT4 indicators, though lagging, are still effective in confirming the bias of the market. This allows traders to still trade on a profit, though they tend to respond to the market a little bit later. This is fine however, since many professional traders need some sort of confirmation before they decide to enter the market.

Many traders decide based on a fixed set of rules, which must be ticked off prior to doing anything. This is where the use of indicators come in. Using indicators as confirmation makes trading more algorithmic in nature. Meaning, the decision making is already done prior to the actual trade. It becomes a set of “if-then” decisions, which automates the trader’s decision-making process. If the strategy has a statistical edge, the trader should do fine in the long run.

The MACD Indicator

The MACD indicator stands for Moving Average Convergence Divergence. It is an indicator that confirms the market’s bias on the direction of price based on the relationship between two moving averages. Often, it also confirms a trend or when a trend is about to end.

The advantage of using the MACD MT4 indicator is that when you catch a trend using the indicator, it usually allows you to ride the trend right to the end. Neat, right?

The setback of using MACD MT4 indicators though is that it is notorious for lag. MACD histograms usually turn a couple of candles after the actual price has turned. The challenge though is to either to find a sweet-spot on the MACD’s settings to have less of a lag, or to have another indicator that responds a tad faster than the MACD, or to learn price action.

The AMA Indicator

The AMA MT4 indicator is also derived from moving averages. Just like the MACD, it also tends to lag price action. The difference with the AMA MT4 indicator is that it plots dots on the candle where the bias starts to shift to the other direction. This acts as a signal for the trader to enter the market.

Entering the Market Using MACD and AMA Indicators

To enter the market for a buy position, the following rules must be met:

  1. The MACD indicator should be above the zero line but not yet far from it
  2. The MACD indicator should start plotting green histograms
  3. The AMA indicator should plot a blue dot on the signal candle

To enter the market for a short position, the opposite rules would apply:

  1. The MACD indicator should be below the zero line but not yet far from it
  2. The MACD indicator should start plotting red histograms
  3. The AMA indicator should plot a red dot on the signal candle

Exit Strategy – No Stop-Loss, No Fixed Take-Profit

Yes, you’ve read that right. For this strategy, we won’t be having a fixed stop-loss or a fixed take-profit. We will let the market tell us when we should get out of the market. We could do this because we are using a purely indicator based strategy. By doing this, we can squeeze a little bit more pips from the market.

So, what is our exit strategy?

Our exit strategy would act both as a stop-loss, if on a losing trade, and as a take-profit on a winning trade.

The following are our exit rules for a buy trade, whichever comes first:

  1. The MACD histogram turns red
  2. A Red AMA dot appears on the chart

As for our Sell Trade exit rules, the opposite also applies:

  1. The MACD histogram turns green
  2. A Blue AMA dot appears on the chart

Conclusion

This forex strategy isn’t perfect, no strategy is. However, since this is a strategy that tries to catch a trend as it starts and lets the trader ride the trend until the end, the average pips won per winning trade will be far greater than the average pips lost per losing trade.

For algorithmic traders, this is a strategy that could be automated. Filters could be done on the MACD and AMA indicators for the Expert Advisor (EA) to trade automatically.

For those who would prefer to trade manually though, I would suggest that you learn price action to go along with this. By doing so, you will be filtering out some trades that might cause some losses on your trading account. And as usual, trade wisely.

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