Incorporating the MACD Into Your Forex Day Trading

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Incorporating the MACD Into Your Forex Day Trading

When a strategy provides a lot of signals, such as the one I use for trading a 1-minute or 5-minute chart on the EURUSD (see: Forex Day Trades – October 7 and subsequent posts), some traders may find it beneficial to add an indicator to help them figure out which signals to take and in which direction.

The MACD can help in this regard. The reason I don’t personally use indicators is that there is a tendency to become too reliant on them, and thus get sloppy and lazy in reading the price action. Pay attention to the velocity, direction and magnitude of price moves to get the most insight to what the price is likely to do next. When learning though, a MACD can help you establish when you should be going long, or going short.

Figure 1 shows part of the London session, with the pullbacks marked with arrows as potential entry points in the current trend.

Starting from the left, the MACD stays below the zero line. This indicates the trend is down and you’re only looking for short trades. The down arrows mark all the potential short entries if you were simply to take the shorts at the upper envelope band. I usually wait to see how the price reacts around the band before entering, so my entries don’t always occur right at the band.

Two of the down arrows also have an “x” above them. These are trades I would have missed because I was already short from a prior signal. Not all these trades would have been winners, even though the price continued to trend down.

Figure 1. Entries with MACD Confirmation

The last downside trade may be a small profit for some traders or a small loss for others depending on how the trade was managed after the price failed to make a new low.

The MACD then moves above the zero line, indicating the short-term trend is to the upside and you’re looking for long/buy trades. Three long trades are marked.

The first two trades are profitable, while the profitability of the third will depend on how the trade is managed. After the third long entry the price makes several small attempt to make a new high, but can’t. This indicates a bigger pullback is likely coming so a small profit should be taken. See How to Read the EUR/USD-October 16 Day Trades for guidance on how to actively manage trades.

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In figure 1 the both the uptrend and downtrend managed to sustain themselves for at least a few waves, allowing for at least a couple profitable trades.

The MACD will always be either positive or negative, but that doesn’t mean all trades should be taken. If the MACD is moving back and forth across the zero line rather rapidly, then there likely isn’t a sustainable trend worth trading. In the chart above the MACD stays below, and then above, the zero line for some time, which is a sign of a good tradable trend.

If the price isn’t moving in one direction for more than a couple waves at a time, it is probably best not to trade since the price action is too choppy. If you look at a chart and the trend doesn’t look similar to the down or (smaller) uptrend in Figure 1, then trend trading may not ideal in those conditions.

The MACD can help you with deciding which side of the market to trade on–long or short. But you still need to monitor the price action and determine if the trend is strong or weak so you can decide which trades to take.

How to Incorporate Volume into your Trading Strategy

For traders coming from other markets, you may know the importance volume has when making trading decisions. However, for years, volume has generally been ignored by forex traders because it has been so hard to ascertain. There is no central exchange for currency transactions, so there is no perfect way to measure the amount of volume being actually traded. These days there is enough information out there to determine daily and even hourly buying and selling pressure. There are gauges of volume that traders can easily access, whether they be from charting software tools, the FX broker or a Bloomberg terminal.

Essentially, volume is important because it can prepare traders for breakouts and confirm them when they happen. Secondly, volume indicators can confirm the strength of trends, for example, a substantial move in a light trading environment can be reversed quickly and dramatically. Thirdly, volume can identify reversals. To find this specific trading opportunity, traders can look for times when volume is decreasing while at the same time make an estimation for when a trend is starting to stall or waver. The difference between the second and third example is that in the third example, the reversal doesn’t necessarily occur with low volume; it is witnessed in an environment of renewed buying/selling interest after a period of declining trading activity, consolidation or exhausted price behaviour.It is the volume’s trend that is broken rather than the price trend. Incorporating volume into your strategy is important but it should be used in combination with other technical indicators such as support and resistance levels, MACD and overbought/oversold signals.

Below is the AUD/USD chart over the past six months. It includes RSI, MACD and volume indicators.

We can see that since late September, after buying pressure exhausted itself, we can see that the level of interest in the Australian dollar against the US dollar declined. This interest has been both for buying and selling. In fact, since the 10th of December, when the price started retracing higher, volume has decreased further, perhaps expectedly, over the holidays.

What does this all mean? Firstly, I would say that as the currentmove higher is founded on weak buying interest, the rally is on shaky ground. It might not take much to knock the aussie off its perch, especially as it’s reached now an overbought level indicated by the relative strength indicator (RSI). Secondly, I would say that as volume has fallen since September, in the coming days or weeks, we may see a set of new price drivers set the tone for the pair’s next move. The current volume trend says to us that there is little new information impacting the direction of the currency pair, or in other words most market information has already been priced in. It’s impossible to determine when that new driver will come, but when it does, we may see some relatively dramatic price behaviour, especially if it is a shock that wakes traders out of their holiday complacency.

All essays, research and information found above represent the analysis and opinion of Leverate only. As such it may prove wrong and be a subject to change without notice. Opinions and analysis were based on data available to the author of the respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Leverate does not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Leverate is not a Registered Securities Advisor. By reading Leverate’s reports you fully agree that they will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investment trading and speculation in any financial markets may involve risk of loss.e risk of loss.

Incorporating Fibonacci Retracement in your Existing Trading Strategy

In today’s difficult and especially unpredictable trading environment, one of the best tools to help you find exit and entry signals might incorporate a practical Fibonacci retracement strategy in conjunction with other widely used technical indicators such as support and resistance levels, MACD and momentum indicators such as RSI.

Fibonacci retracement works well using MACD because the parameters of market swings can be pre-set with the moment indicator (MACD) confirming a reversal in the trend.

Take for example the USD/JPY chart below:

Around mid-April the price bottoms out and bounces up from the long-term upwards trending support line. The price stabilises and the MACD indicator produces an upward cross. The combination of these important signals might convince a trader to jump in long at the first green arrow.

As the price moves up with momentum, it becomes clear that the limits of the short-term range are in place and Fibonacci lines can be drawn over the chart.

The first challenge to the upwards price momentum occurs at the first blue cross set at the 0.618 Fibonacci level. A trader might plausibly argue that the move has run its course and can go no further than the long term downwards trending resistance line. However, the MACD indicator says otherwise and signals the US dollar still has legs. In this case, indicators working hand in hand, we can see that a correct exit sign has yet to be produced and a wiser trader would hold the position.

The price then breaks out up past resistance and hits the 0.718 Fibonacci level where it stalls. This is the level before the currency fully retraces and presents a formidable trial. At this point momentum and MACD starts to stabilise. The price falls slides below a minor support line and the MACD throws up a downwards cross.

CombiningFibonacci, MACD and resistance/support we obtain a solid exit point, which is also ashort entry signal indicated by the second green arrow. The wise trader then swaps the buy position for a sell.

Finally, as the price heavily drops back into the long-term triangulating range it immediately bounces up to hit the long term downwards trending resistance line indicated by the second blue cross and the 0.50 Fibonacci level. The calm trader would hold the short position as the MACD indicator foretells further selling pressure. After a couple of days, the price continues its journey south towards the upwards support line which is another exit (and potentially entry) signal indicated by the third green arrow. If the MACD crosses over at this point, it would then confirm the swing.

The Fibonacci Retracements at 23.6%, 38.2%, 50% and 61.8% stem from ratios found within the Fibonacci sequence. The 50% retracement is not based on a Fibonacci number. Instead, this number stems from Dow Theory’s assertion that the Averages often retrace half their prior move and represents an important level.

Fibonacci works well with momentum indicators such as the relative strength index (RSI) because it helps to identify levels at which the price might turn up or down from overbought or oversold regions.

Take for example the daily USD/CHF chart below:

In this chart, we can see that the price rose to the 0.618 Fibonacci level, hitting at the same time an overbought point indicated by the RSI signal line touching 0.60. The price stalls at this level and starts to double back producing a sell signal.

The position is closed at the point at which RSI goes to oversold coinciding with the price dropping to the formidable 200 day moving average. It should be noted that following this trade, the price can be perceived as range bound with strength limited by the 0.50 Fibonacci level and weakness supported at the 0% Fibonacci level.

In summary, we can see that Fibonacci percentages are best used in combination with other technical indicators. In fact, most analysts would say that it is quite ineffective by itself. Fibonacci levels should never be seen as exact points to enter or exit positions and therefore other technical indicators must provide important context. Fibonacci levels on a chart should be viewed as approximate areas at which the market considers its next move and not as a clear cut mathematical marker.

All essays, research and information found above represent the analysis and opinion of Leverate only. As such it may prove wrong and be a subject to change without notice. Opinions and analysis were based on data available to the author of the respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Leverate does not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Leverate is not a Registered Securities Advisor. By reading Leverate’s reports you fully agree that they will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investment trading and speculation in any financial markets may involve risk of loss.e risk of loss.

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