The MACD Trend Following Strategy, as the name suggests, is one of the best trend following strategies to use. MACD stands for moving average convergence divergence. As moving averages change over time, it will be up to to decide whether they are generally converging or diverging. With this knowledge in hand, the MACD Trend Following Strategy makes it much easier to predict near-future price movements. This strategy is similar to the trend following strategy we developed previously.
Even if you’re wrong on a trade, one of the most important features of trend following strategies is that you can usually limit your losses. This is because, ultimately, the market will reverse and resume the trend. But more importantly, it maximizes your potential profit at the same time. This strategy is included in our complete list of the best trading strategies compiled on the internet.
Our team here at Trading Strategy Guides.com strives to provide you with the best trading strategies.
The MACD Trend Following Strategy works best on the higher time frames, like the 4h chart or the daily chart. So, if you’re a swing trader, this is the perfect strategy for you. We developed this trend following strategy to show the world how to properly use the MACD indicator. Our goal is to show how accurate this tool can be in forecasting market turning points.
Now, if you’re a day trader and don’t like holding positions overnight, don’t worry. We’ve got your back. Our favorite day trading strategy, Day Trading Price Action- Simple Price Action Strategy, has attracted a lot of interest from the trading community.
Now, let’s move on to the incredible MACD strategy we developed for our traders. We will show you how to use MACD effectively, what a true trend indicator looks like, and a super profit indicator. You’ll also learn why we think the MACD indicator is the best trend following indicator. Here is another strategy called, The PPG Forex Trading Strategy.
What is the MACD indicator used in this trading strategy?
The beauty of the MACD Trend Following Strategy is that it only requires the use of one simple tool: the MACD indicator. By the way, this is among the most popular Forex indicators.
Without further ado, let’s move straight to the point and:
- Define what is the MACD indicator.
- How the MACD indicator works.
- What MACD indicator setting to use.
The MACD is one of the most powerful trend following and momentum indicator. The MACD is a commonly used technical indicator. As stated, the acronym stands for Moving Average Convergence Divergence.
In simple terms, a trend-following indicator helps you to determine the overall direction of the market. Whether it is up (bullish divergence) or down (bearish divergence). On the other hand, 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:
The MACD can provide an 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. This indicator is especially useful in forex trading strategies. It 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 movements 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. It can be also used in combination with the MACD Trend Following Strategy for a higher success rate.
What about the indicator setting?
The preferred settings for the MACD indicator are the default settings.
Let’s move forward to the most important part of this article: the buy/sell rules of the MACD Trend Following Strategy.
Now, before we go any further, please take a piece of paper and a pen and note down the rules.
Let’s get started…..
Note** Some reported to us that the Default MACD indicator on MT4 does not have these two lines like you see in our example. You can find a version for the strategy here on Forex Factory: https://www.forexfactory.com/showthread.php?t=69409
MACD Trend Following Strategy
(Rules for A Buy 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. 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 your 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 MACD 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 MACD 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 criteria such as 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 divergence 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 for our entry order. When the MACD line (the blue line) produces signal line crossovers (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
The MACD Trend Following Strategy is a very simple trend-following strategy and yet a very profitable strategy at the same time. As the saying goes, “The trend is your friend” and no matter if you’re just starting as a Forex trader or you’re already an established trader life is much easier when trading in the direction of the line of least resistance rather than fighting the trend which is a loser’s game.
The success behind the MACD Trend Following Strategy is derived from one simple principle: momentum precedes price. Our team at Trading Strategy Guides.com doesn’t claim to be perfect, but we have a solid understanding of how the market works. For those of you who are not fans of higher time frames and swing trading, we recommend the “Day Trading Price Action- Simple Price Action Strategy” which can be more suitable for your trading style.
Thank you for reading!
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