The MACD Indicator Strategy

The MACD Indicator Strategy

Submitted by adil on Tue, 02/11/2014 - 12:21

The Moving Average Convergence Divergence Indicator strategy consists of three different indicators. Two of them are moving average indicators whereas the third is a momentum indicator. This strategy actually combines MACD with exponential moving averages. The core purpose of using this strategy is to determine at what time the asset being traded will change its direction.

Any trader needs to fully understand all the basic principles to trade these set of strategies successfully and profitably. Some of these elements have been discussed in following points one by one.

Preferred Trade Types:

There are only two trade types that will help traders to generate a lot of profits while using this strategy.

• Call/Put
• Touch/Not touch

Rules to Follow:

Traders need to follow and abide by a set of rules no matter whatever strategy they use and same is true for MACD Indicator strategy. First and foremost, traders must ensure that the asset they want to trade must be trending. The MACD indicator strategy will be most effective when an asset has touched an area of short term support and resistance due to a mild pullback. In this regard, the direction of the moving average will indicate the trend of the asset.

Trade Setup:

Following indicators are used when you employ MACD Indicator strategy.

• The Color Coded MACD Histogram:

This is the indicator that traders can customize according to their particular needs. The histogram changes colors as the trend changes. There are two colors in the histogram that are red and green. The trend indicates possible Call signals when color changes from red to green. On the hand, if green changes to red, it is a possible Put signal.

This color coded histogram allows traders to enter into a trade relatively early as compared to traditional MACD indicators.

• 50 EMA:

The 50 day exponential moving average is kind of short term moving average. This is the signal moving average and traders can alter its colors in order to clarify the situation. Most often, the indicator is set as red.

• 110 EMA:

As compared to 50 EMA, the 110 EMA moving average is a long term moving average. in this case, the blue color is selected for the purpose of clarity. The function of this indicator is to act as the support or resistance level for asset price.

Setting the Trade:

The setting of the trade is explained with the help of an example. Suppose that 50 exponential moving average is crossing 110 exponential moving average in trend direction.

For Call Trade:

• The 110 EMA should be under 50 EMA.
• The 50 EMA must reject the asset.

The color of MACD histogram should change from red to blue.

For Put Trade:

• In this case, 110 EMA should be above 50 EMA.
• The 50 EMA pulls the asset backs to itself.

The color of MACD histogram changes from blue to red.

Setting Expiry Times:

The chart a trader uses for this strategy will determine the expiry time of the trade. The rule of thumb is to let the asset elapse at least 4 candlesticks as expiry time. This means that the expiry time should be 4 hours minimum if you use one hour chart. Similarly, the expiry time must be at least 4 days if you use a daily chart.