MACD Bollinger trading signal

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A Simple Day Trading Strategy Using Bollinger & MACD

By Galen Woods in Trading Setups on October 19, 2020

This simple day trading strategy was published on by Markus Heitkoetter, a day trading coach from Rockwell Trading. He is also the author of The Simple Strategy – A Powerful Day Trading Strategy For Trading Futures, Stocks, ETFs and Forex.

This day trading setup uses the MACD indicator to identify the trend and the Bollinger Bands as a trade trigger.

The MACD parameters are:

  • 12 for the fast moving average
  • 26 for the slow moving average
  • 9 for the signal line

The Bollinger Bands settings are:

  • 12 for the moving average
  • 2 standard deviations for the bands

Trading Rules

Rules For Long Day Trade

  1. MACD above signal line and zero line
  2. Place buy stop order at the upper band of Bollinger Bands

Rules For Short Day Trade

  1. MACD below signal line and zero line
  2. Place sell stop order at the lower band of the Bollinger Bands

Trading Examples – Day Trading with Bollinger & MACD

Winning Trade

In his article, Markus Heitkoetter used the trading time frame of 4500 ticks for S&P E-mini contract. It means the chart plots a bar every 4500 trades. To keep things simple, we followed the recommended timeframe.

The day started off in congestion before having a nice bear run. This simple day trading strategy managed to catch the beginning of this bear run for a nice profit.

Let’s take a look at this trade in detail.

  1. We had the most potent bull run of the day here. However, this higher high coincided with a lower high on the MACD histogram. This occurrence is a bearish divergence, a warning sign for reversal. This bearish divergence set an excellent context for short trades.
  2. Here, prices fell, and MACD moved below both the zero line and its signal line. That was our cue for a downtrend. A sell stop order was placed at the lower Bollinger Band to anticipate a short trade.
  3. After the MACD had confirmed a downtrend, a bullish outside bar formed but had little follow-through. It was the last bullish attempt before prices broke down further.

Finally, as prices pushed through the lower Bollinger Band, our sell stop order was triggered. And we have a winner.

Losing Trade

Just like the first chart, this is a 4500 tick chart of the S&P E-mini contract on a full Globex session.

The simple day trading strategy triggered a short trade at the red arrow. It was the worst entry point for us.

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Let’s break this down and try to understand what was going on.

  1. The day started off congested as shown by the increasing tails and smaller bodies on each candlestick. The constricting of the Bollinger Bands was another indicator that volatility was dropping.
  2. A congestion inevitably leads to a breakout. The three consecutive red bars was the breakout from the congestion. At the same time, MACD confirmed a downtrend for us, and we entered short at the lower Bollinger Band. (red arrow)
  3. However, the downthrust punched out a lower low that was not supported by the MACD momentum. That was a bullish divergence that warned us against taking this trade.

Ultimately, this breakout downwards turned out to be a morning fake reversal. We entered short at the low of the day.

What could be worse? (Not having a stop could be worse.)

Review – A Simple Day Trading Strategy using Bollinger and MACD

Using only two indicators and two simple steps, this is indeed a simple day trading strategy.

I have tried it on different time frames and found this day trading strategy to be surprisingly robust for catching breakout trends.

By demanding that the MACD rises not only above its signal line but also its zero line, this day trading strategy can locate short-lived intraday trends. This application of MACD is starkly different from Gerald Appel’s original basic MACD trade.

If you want to restrict yourself to only high probability trades, take setups that occur after MACD first crossed the zero line. This rule will keep you in fresh trends and not the maturing ones that are more likely to reverse.

There is a significant caveat about the exit strategy. I did not follow the exit method recommended by Markus Heitkoetter as I wanted to keep things simple.

He used a certain percentage of the average daily range of the past seven trading days to determine his stop and target size. It is a sound approach based on volatility, but it increases the number of parameters involved.

You have to choose how many days to include in your average trading range and the percentages to use for your stop and target sizes. You also have to ensure that these parameters are consistent with your trading time frame. Like what Markus Heitkoetter pointed out, he updates the tick setting for the instruments they regularly trade to account for changes in market volatility.

So, unless you can keep up with adjusting those parameters, you might want to consider a more straightforward way to exit your trade.

Bollinger Bands® and MACD Strategy

Bollinger Bands® can provide invaluable signals for technical traders, and when combined with the Moving Average Convergence Divergence (MACD) indicator, gives traders insight into both volatility and momentum in the forex market .

Before reading further, be sure to understand the basics of both the Bollinger Band ® and the MACD indicator.

This article explores:

  • What is the Bollinger and MACD combination?
  • How to use Bollinger Bands® and MACD to trade forex
  • Advantages and limitations of the Bollinger Bands® and MACD system

What is the Bollinger and MACD Combination?

As the title suggests, traders can make use of Bollinger Bands® in conjunction with MACD to support trade set ups. Bollinger Bands® allow traders to view the cyclical nature of volatility while the MACD is an effective trend-following, momentum indicator.

Using these two indicators together can assist traders when making higher probability trades as they can gauge the direction and strength of an existing trend , along with volatility. As a result, traders can use the MACD to assess if a trend is picking up in momentum or slowing down and setting up for a possible breakout; while the Bollinger Band® can be used as an entry trigger and subsequent confirmation of a trade.

How to Use Bollinger Bands® and MACD to Trade Forex

Traders can trade with Bollinger Bands® and MACD in a number of different ways but two of the most common ways to trade with these two indicators involve breakouts and trend trading.

Bollinger Band® Breakout Strategy using Bollinger Bands ® and MACD

Traders looking to trade Bollinger Band® breakouts should consider the following steps:

  1. Identify a trending market using the MACD
  2. Look for divergence in the histograms of the MACD (signalling potential breakout)
  3. Look for entry on a break of the 20 moving average or trendline
  4. Look for confirmation of a breakout via a breach of the Bollinger Band®, along with increased volatility (Bollinger Bands® expanding) and increasing momentum (longer histograms)

In the GBP/NZD chart below, it is clear to see a strong downtrend where price starts to trade within a descending channel. Traders can trade the breakout by looking for slowing downward momentum (divergence in the MACD histograms).

A break of the 20 period Moving Average (centre line within the Bollinger Bands®), after witnessing bullish divergence, provides the signal to enter the long trade. The dotted line on the upper side of the channel represents trendline resistance and coincides with the 20 MA of the Bollinger band® when price breaks through it. A break of these two lines confirms that this is a significant level, further reinforcing the bullish bias.

The MACD indicator supports the bullish trade as the MACD line has crossed the signal line and continues to move above the signal line, showing strong upward momentum. The Bollinger Band® then confirms the move to the upside as price begins to “walk the band” on increased volatility (expansion of the band).

Stops can be placed below the lower Bollinger Band® or at the low of the descending channel. Targets can be placed at a previous high or significant level of resistance – while maintaining a positive risk to reward ratio . Since there is a possibility that the breakout trade turns into a trend reversal, traders should consider multiple target levels and manually move stops up or utilize a trailing stop.

Trend Trading using Bollinger Bands ® and MACD

The Bollinger Band®, MACD combination can also be used in trending markets via the following process:

  1. Identify the trend using MACD
  2. Use bounces off the 20 MA as potential entry points (in line with the trend)
  3. Look to the MACD for confirmation of continuing momentum
  4. Use the lower (higher) band as a stop loss in an uptrend (downtrend).

The EUR/USD chart below depicts the Bollinger and MACD trend trading strategy. The MACD confirms the uptrend with MACD line above the signal line and both lines are above the zero mark. This sets the filter that traders should only be looking to enter long trades.

After the initial spike in momentum to the upside, momentum slows down and although the MACD line crosses below the signal line, these moves are on low volume and result in short term consolidation rather than a move against the current trend. The uptrend is further reinforced by the fact that price bounces off the 20 MA and continues making higher highs and higher lows.

Traders can look to enter long trades in accordance with the Bollinger Band ® Squeeze (green arrows). Long traders can either choose to exit the trade as price drops to the 20 MA or can look for a breach of the lower Bollinger Band® as the exit signal.

Traders can make use of a trailing stop or stops can be manually moved along the lower Bollinger Band® as price rises. Targets can be set at significant levels of support and resistance while maintaining adequate risk management .

MACD and Bollinger Bands Strategy – Reliable Buy/Sell Forex Trading Strategy

Today, we look into the MACD and Bollinger Bands Strategy and how to get it to work for us by providing us reliable buy/sell signals. The Bollinger Bands have been around for quite some time and they have been invented by John Bollinger, and essentially they are used to identify a price volatility and they do that by using a standard deviation around a simple moving average. Typically Bollinger Bands use a 20 period MA with a 2 standard deviation on both sides and they are used to project resistance above and support below.

In this article, you’re going to learn how to master the use of Bollinger Bands to identify high probability trade entry and potential exits for trading the FX market. To use the techniques outlined in this article, it will definitely enable you to find some very high probability trade setups. Bollinger Bands I think are one of the most misunderstood of all technical indicators. People often think that it gives an absolute kind of buy and sell signals which are further from the truth as they simply give you more information of rather the price are high or low on a relative basis. By definition price is high or overbought at the upper band and prices are low or oversold at the lower band.

We can use Bollinger Bands to build rigorous trading approaches in combination with other tools and price action. In this regard going forward, you are going to learn how to trade using the Bollinger Bands in combination with the MACD indicator.

MACD and Bollinger Bands Strategy Settings

This basic premise behind this strategy is to help you capture that high momentum and explosive moves that we often see in the market. This is a scalping technique that uses both the Bollinger Bands indicator to identify price volatility and the MACD indicator to gauge the trend momentum. We’re going to use the standard default settings on both of these indicators:

Bollinger Bands settings:

  1. Period = 20 Day Exponential Moving Averages;
  2. Deviation = 2 Standard Deviation;

MACD settings:

  1. Slow EMA = 26;
  2. Fast EMA = 12;
  3. MACD Line = 9;

MACD and Bollinger Bands Strategy Chart Setup

This strategy basically works on any currency pair and on the 15-minute chart. The success behind this strategy requires a lot of patience until all the conditions are aligned in favor of the trader. We’re going to use the Bollinger Bands for a breakout and essentially we’re looking for these bands to narrow as this is indicative of a ranging market. Basically, we’re going to try to catch the breakout from this small range zone as small range candles are followed by big range candles.

MACD and Bollinger Bands Strategy – Entry Rules

MACD and Bollinger Bands Strategy – BUY/SELL signals:

  • Wait for the upper and lower Bollinger Bands to narrow;
  • Buy at the moment we penetrate the upper band with the MACD histogram above the zero line, but with the MACD histogram below both EMAs.
  • Sell at the moment we penetrate the lower band with the MACD histogram below the zero line, but with the MACD histogram above both EMAs.
  • Stop Loss in both cases 5 pips below/above the middle Bollinger Band.
  • Take Profit first level of resistance.

MACD and Bollinger Bands Strategy – Buy Setup

In our first example, we can see that even though the upper band was penetrated the MACD only confirmed the signal later on which give us a much better entry price and the timing was also perfect as soon as we got in the trade the market accelerated to the upside.

MACD and Bollinger Bands Strategy – Sell Setup

MACD and Bollinger Bands Strategy – Use it to prevent False Breakout

The main benefit of using this strategy is that the signal is not generated as soon as we penetrate the Bollinger bands, this way we’re eliminating a lot of the potential false breakout that the market is prone to do. But instead, we can see that the signal is always generated at a better price and the timing is a lot better with very little drawdown.

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