One of the most popular technical indicators among Forex traders is the MACD oscillator. Being an oscillator, it is placed at the bottom of a chart.
Traders like the fact that it is extremely visual, and, like the RVI that we discussed last time, it has a signal line. This means that it is unlikely to be caught on the wrong side of the market if you pay attention to what the signal line of the MACD is saying.
The MACD stands for Moving Average Convergence-Divergence and it is being offered by all trading platforms in the world. We’ll use the MetaTrader for exemplifying how to apply this indicator on a chart.
The chart above shows the daily EURUSD time frame and the path to finding the MACD oscillator on the MetaTrader platform. As you can see, it is offered with the default setting, therefore there’s no need to import it onto the trading platform.
3 Ways to Buy/Sell with MACD
There are many ways to use the MACD oscillator, but before discussing them, let’s have a look at the elements that form it. As it can be seen in the chart below, the MACD travels below or above the zero level, with a black histogram and a blue line that follows the histogram closely.
The colors can be easily changed by clicking anywhere on the trading screen and selecting the Edit tab. This can be done with any trading indicator on the MetaTrader platform.
Buy or Sell the Zero Cross
One great way to trade with the MACD is to buy or sell when the histogram is crossing the zero level. This simple approach works with great results on the bigger time frames.
However, it is not referring to the histogram crossing the zero level, but the signal line (blue line), like it can be seen below. This way, fake moves given by the MACD histogram are filtered for a better entry and profitable results.
While this is working most of the time, sometimes this signals need to be further filtered. To do that, the old fashion divergences can be used.
Use Divergences to Filter Signals
If the signal, as mentioned above, comes after a bullish or bearish divergence formed previously, it should be considered a stronger signal than otherwise. From the three instances shown above, the third trade should be more aggressive as price bounced after the MACD signal formed a bullish divergence.
Out of the three signals the MACD gave on this time frame and currency pair, the last one should be traded more aggressively, as it is backed by a bullish divergence. The same should be true if a bearish divergence forms before the signal line crosses the zero level to the downside.
So far, we discussed two ways to enter a trade using the MACD oscillator, but we didn’t mention anything about the exit. Where should the take profit be?
Finding the Right Exit
The first thing to look at is the histogram, and if this one reverses (one black candle should be shorter than the previous one), meaning the overall trend starts to fade. Sometimes, the oscillator is giving fake moves, in the sense that you’ll have a MACD that is decreasing, only to be followed by an even more aggressive move in the direction of the previous trend.
These things happen. However, considering the time frame, there should still be enough profit to be made on this conservative approach.
A conservative trader will strive in such an environment, while an aggressive one will look to pick a top or a bottom. When it comes to Forex trading, picking tops and bottoms is a tricky and costly thing to do.
Using the statement from above, the last two trades gave not only excellent entries but great exits as well, even though some moves could have been extended some more. In the end, what is important is for the trading account to grow.
Another thing that can reinforce the moment we should exit a trade, is to wait for the histogram (black lines) to go below the signal line (the blue line) in a bullish trend, and above, in a bearish trend.
This signals the market turned and it is about to correct the previous trend. Using our examples, when this is happening, we have a confirmation that closing the previous trades was the right thing to do as the correction already started.
Keep in mind that the examples above are based only on one currency pair, the EURUSD, and one time frame. Respecting all the rules mentioned here and looking at other time frames and currency pairs will result in other opportunities to profit from Forex trading.
What matters the most is to be disciplined and not to allow emotions to alter the trading setup. Anyone able to do that is trading material!