How to make the most out of the MACD Forex Trading strategy

A Couple of Words About Indicators

MACD (Moving Average Convergence/Divergence Indicator) is used to check the strength the trend, the possible direction of the trend and the possible reversal points.

Sound great to have this one tool for so many options?

The default settings of this indicator are 12, 26, 9 and we use such.

In the section “Further adjustments” we are going mention what other settings you can use for the advanced variations.

MACD is adored by many traders and thus broadly-used indicator for its simplicity and clear signals of the trades entry points.

As said above, to confirm the direction of the trend additionally we will use the 200 period MA.

Technical Information

Indicators: MACD (with default settings 12, 26, 9); 200 Moving Average.

Timeframe: 1h.

Currency pair: Any, but we take EURUSD as an example.

Stop Loss/Take Profit: 10/20 pips each.

200 Moving Average usually is used to confirm the direction of the trend:

- If the price line is placed over the 200 MA, then the uptrend is spotted and vice versa – the price line under the 200 MA provides signals about the downtrend.

Please, note: if the price is over the 200 SMA – we are looking for the BUY signals only, if the price is below the 200 SMA – we search for the SELL signals only.

At the same time the MACD indicator clearly shows the entry points of the trades.

The crossover of the moving averages of the MACD is the most widely used entry signal.

Long trade entry rules:

1. The price line is above the 200 Moving Average pointing the uptrend.
2. The Fast Moving Average of MACD makes a cross upward with the Slow MA.
3. Check the MACD histogram slopes for the confirmation of the lasting uptrend – the slopes of the histogram should cross the zero level above.
4. When all the conditions are met, we enter the trade.*

*Please, note that we use the cross of the MACD Moving Averages and the reverse of the MACD’s histogram slopes as the entry point.

However, as mentioned in the Adjustments settings, this issue can also be a matter of change.

Short trade entry rules:

1. The price line lies under the 200 moving average indicating the downtrend.
2. The Fast Moving Average of MACD makes a cross downward with the Slow MA.
3. Check the MACD histogram slopes for the confirmation of the lasting uptrend – the slopes of the histogram should cross the zero level below.
4. When all the conditions are met, we enter the short trade.

Backtesting Results

Profits

Trades|Period*

*How long it took us to enter the 50 trades for the Training Set and 20 trades for the Forward Testing.

A Reminder: in order to save your valuable time and efforts, we have introduced the system of backtesting when you perform only 50 trades through 3 different types of market (Bullish, Bearish and Flat markets) and then again 20 trades through the given types of market, but during other periods.

Then with simple math calculations, we can make conclusions about effectiveness or irrelevance of the chosen strategy.

The full version of the theory of our backtesting experiments and how did we came up with the idea of such backtesting you can read here.

Conclusions

It is clear that this strategy based on the GIVEN settings cannot give the wanted results, although it is not a total loss, but a professional trader probably won’t be satisfied by the gained profits.

It is obvious that these indicators require volatile markets to show their best (as you can see, the worst performance was during the Flat markets).

Although, we have received the positive results through the Bear markets, for example, but can such result satisfy any trader – 160 pips in more than 3 months?

Apparently, the entry rules of the strategy are too selective and we have missed some trade set ups.

Again, we want to emphasize that we received such results by backtesting at the given timeframe, with the mentioned Stop Loss and Take Profit and entered the trades based on the signals we defined as proper.

Are there any better way to trade these indicators? We bet there is, but only with the adaptation of the settings to your needs and needs of your strategy.

Further Adjustments for Better Results

What particularly can be a matter of the additional change and backtesting?

1. As we have mentioned before, we use the MACD indicator with the default settings.

   However, there are dozens of theories that for some purposes the custom settings might work the best.

2. Stop loss and take profit – one of the ways to utilize the Parabolic SAR is to use the dots as the marks to place the trailing stop.

   Besides, you can try different ratio of the TP and SL, or close the trades manually when the Parabolic SAR’s dots show the signal of the reversal.

3. Timeframe and the currency pair – try this strategy for scalping or the daytrading;
4. You can try MACD indicator alone or accompanied with other indicators.

   Try what combo can work the best for you – maybe Stochastic or RSI, Awesome Oscillator or Parabolic SAR.

Please, take into the account that our floating spread is set to 1.

Do not forget that the size of the spread matters and the larger it is, the bigger should be the profits to cover it up.

As you can see, adjust, test and then change accordingly – is the only possible way to find the options suitable for YOU.

Try It Yourself

As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.

The testing of this strategy was arranged in Forex Tester with the historical data that comes along with the program.

To check this (or any other) strategy’s performance you can download Forex Tester for free.

In addition, you will receive 22 years of free historical data (easily downloadable straight from the software).

Here you can read more about understaing the MACD indicator.