What is the MACD indicator?

The beauty of the MACD Trend Following Strategy is that it only requires the use of one simple tool: the
MACD indicator, which by the way is among the most popular Forex indicator.

Without further ado, let’s move straight to the point and:

● Define what is the MACD indicator;

So, what is the MACD indicator?

The MACD is one of the most powerful trend following and momentum indicator. The MACD is a
commonly used technical indicator and the acronym stands for Moving Average Convergence D
ivergence.

Put it simple, a trend following indicator helps you to determine the overall direction of the market, be it
up (bullish) or down (bearish). While a momentum indicator seeks to determine the speed of the trend.
Put them together and you have the perfect combination for a trend following strategy.

A picture is worth a thousand words, so here is how the classical MACD indicator looks like on a chart:
 MACD Indicator

The MACD can provide earlier indication that an OLD trend is about to end and a NEW trend is about to
start. The MACD manipulates its moving averages in a rather clever way and can signal changes in trend
much closer to when they actually occur. Please have a look at the chart example below to see the
power of the MACD indicator.
So, how does it work?

Well, the MACD’s moving averages and histograms (see chart below) are derived from the price chart.
They are calculated using a formula which adds greater weight to the most recent price data.

Remember? Price is king!

Our popular Price Action Pin Bar Trading Strategy is a great introduction to what a pure price action
strategy should look like and it can be also used in combination with the MACD Trend Following Strategy
for higher success rate.
What about the indicator setting?

The preferred settings for the MACD indicator are the default settings.

See below:
 MACD Trend Following Strategy
(Rules for A Sell Trade)

Step #1: Wait for the MACD lines to develop a higher high followed by
a lower high swing point.

This is an unorthodox approach to technical analysis, but we at Trading Strategy

Guides.com are different and we don’t mind doing uncomfortable things if that’s what it takes to
succeed in this business.

First, let’s visualize how an authentic swing point really looks on the MACD indicator:

The first rule of thumb to recognize a swing high on the MACD indicator is to look at the price chart if the
respective currency pair is doing a swing high the same as the MACD indicator does. A higher high is the
highest swing price point on a chart and must be higher than all previous swing high points. While a
lower high happens when the swing point is lower than the previous swing high point.
This brings us to the next rule of the MACD Trend Following Strategy.
 Step #2: Connect the MACD line swing points that you have identified in Step #1
with a trendline

This step is quite simple, right?

See below, how you chart should look like after you correctly identified the swing points on the
MACD indicator and connected them through a trendline.

At this point, we really ignored the histogram because much of the information contained by the
histogram is already showing up by the moving averages. Look at the price action now and
compare it to our MACD trendline we drew early. We can clearly notice that the MACD contains the
price action much better and reflects the trend much clear.

But, at this point, we’re still not done with the MACD indicator, which brings us to the critical part of our
MACD Trend Following Strategy.

Step #3: Wait for the MACD line to break above the trendline. (Entry at the
market price as soon as the MACD line breaks above)

When the MACD line (the blue line) crosses the signal line (the orange line) it’s an early signal that a
bullish trend might start. However, if trading would be that easy we would all be millionaires, right? And
that’s the reason why our MACD Trend Following Strategy is so unique. We’re not only waiting for the
MACD moving averages to cross over but we also have our other criteria for the price action to break
aka the trend line we drew early.

This is a clever way to filter out the false signals, but you have to be equipped with the right mindset and
have patience until all the piece of the puzzle come together. If you were to trade just based on the
MACD crossover over time you’ll lose money because that’s not a reliable strategy. But if you use the
MACD indicator along with other criterias such what this strategy tells you to do, you will find great
trade entries on a consistent basis.

Step #4: Use Protective Stop Loss Order. (Place the SL below the most recent
swing low)

Now, that you already know how to enter a trade at this point you have to learn how to manage risk and
where to place the SL. After all, a trader is basically a risk manager.

You want to place your stop loss below the most recent low, like in the figure below. But make sure you
add a buffer of 5-10 pips away from the low, to protect yourself from possible false breakouts.
Did you notice?

The MACD Trend Following Strategy triggered the buy signal right at the start of a new trend and what is
most important the timing is more than perfection. We bought EUR/USD the same day the bullish trend
started.

Now, what this has to do with the SL?

Basically, a good entry price means a smaller stop loss and ultimately it means you’ll lose a lot less
comparing it with the profit potential, so a positive risk to reward ratio.

Step #5: Take Profit when the MACD crossover happens in the opposite direction
of our entry

Knowing when to take profit is as important as knowing when to enter a trade. However, we want to
make sure we don’t use the same trading technique as for our entry order. When the MACD line (the
blue line) crosses the signal line (the orange line) we want to close the position and take full profits.
Before taking profits, it’s important to wait for the candle close – either the 4h or the daily candle –
depending on the time frame you trade so you make sure the MACD crossover actually happens.

Note** The above was an example of a buy trade using the MACD Trend Following Strategy. Use the

exact same rules – but in reverse – for a sell trade. In the figure below you can see an actual SELL

trade example using the MACD Trend Following Strategy. Take a look:
We’ve applied the same Step #1 and Step#2 to help us draw the trendline and followed Step #3 to
trigger our trade.

Below Are Great Examples of this Trading Strategy:

Example #1: GBP/USD Daily Chart. Long Trade Example