MACD Combo Trading

MACD Combo Trading is based on two slow simple moving averages and MACD oscillator.

Time Frame 30 min or higher.

Currency Pairs: majors.

Forex indicators setup:

50 simple moving average, close;

100 simple moving average, close;

MACD (12, 26, 9)

Trading Rules

Buy

Wait that 50 SMA crosses upward 100 SMA.

When the price has broken of 10 pips the SMA enter a buy order if MACD histogram is above of zero line.

Initial stop loss 30-50 pips below the entry bar. Move stop loss at breakeven and close all when the price breaks below the 50 SMA by 10 pips.

Sell

Wait that 50 SMA crosses downward 100 SMA.

When the price has broken of 10 pips the SMA enter a sell order if MACD histogram is below of zero line.

Initial stop loss 30-50 pips above the entry bar. Move stop loss at breakeven and close all when the price breaks above the 50 SMA by 10 pips.

Trading Examples

In the first example EUR/USD on 60 min chart. when the price crosses above both the 50- SMA and 100-SMA. However, we do not enter since MACD crossed to the upside more than five bars ago, and we prefer to wait for the second MACD upside cross to get in. The reason why we have this rule is because we do not want to buy when the momentum has already been to the upside for a while and may therefore exhaust itself. The second trigger occurs a few hours later at 1.1945. We enter the position and place our initial stop at the five-bar low from entry, which is 1.1917. Our first target is two times our risk of 28 pips (1.1945-1.1917), or 56 pips, putting our target at 1.2001. The target gets hit at 11am EST the next day. We then move our stop to breakeven and look to exit the second half of the position when the price trades below the 50-hour SMA by 10 pips. This occurs on March 20, 2006, at 10am EST, at which time the second half of the position is closed at 1.2165 for a total trade profit of 138 pips.

The next example is for USD/JPY on a daily time frame. The trade sets up on September 16, 2005,

when the price crosses above both the 50 and 100 SMA. We take the signal immediately

since the MACD crossed within five bars ago, giving us an entry level of approximately 110.95.

We place our initial stop at the five-bar low of 108.98 and our first target at two times risk, whichcomes to 114.89. The price is hit three weeks later on October 13, 2005, at which time we move our stop to breakeven and look to exit the second half of the position when the price trades belowthe 50 SMA by 10 pips. This occurs on December 14, 2005 at 117.43, resulting in a total trade profit of 521 pips. One thing to keep in mind when using daily charts: although the profits can be larger, the risk is also higher. Our stop was close to 200 pips away from our entry. Of course, our profit was 521 pips, which turned out to be more than two times our risk. Furthermore, traders using the daily chartsto identify setups need to be far more patient with their trades since the position can remain open for months.

On the short side, we take a look at the AUD/USD on hourly charts back on March 16, 2006. The currency pair first range trades between the 50- and 100- SMA. We wait for the price to break

below both the 50- and 100- moving averages and check to see if MACD at the time went negative less than five bars ago. We see that it did, so we go short when the price moves 10 pips lower than the closest SMA, which in this case is the 100- SMA. Our entry price is 0.7349. We place our initial stop at the highest high of the last five bars or 0.7376. This places our initial riskat 27 pips. Our first target is two times the risk, which comes to 0.7295. The target gets triggered seven hours later, at which time we move our stop on the second half to breakeven and look to exit it when the price trades above the 50- SMA by 10 pips. This occurred on March 22, 2006, when the price reached 0.7193, earning us a total of 105 pips on the trade. This is definitely an attractive return given the fact that we only risked 27 pips on the trade.

In this example on daily chart EUR/JPY On April 25, 2005, we saw EUR/JPY break below the 50-day and 100-day SMA. We check to see that the MACD is also negative, confirming that momentum has moved to the downside. We enter into a short position at 10 pips below the closest moving average (100-day SMA) or 137.76. The initial stop is placed at the highest high of the past five bars, which is 140.47. This means that we are risking 271 pips. Our first target is two times risk (542 pips) or 132.34. The first target is hit a little more than a month later on June 2, 2005. At this time, we move our stop on the remaining half to breakeven and look to exit it when the price trades above the 50-day SMA by 10 pips. The moving average is breached to the top side on June 30, 2005, and we exit at 134.21. We exit the rest of the position at that time for a total trade profit of 448 pips.

MACD Combo Trading as with many trend-trading strategies, they work best on currencies or time frames that trend well. Therefore, it is difficult to implement this strategy on currencies that are typically range bound,