The strategy to be described in today’s article is the MACD histogram strategy, which can be used for exotic currency pairs such equally the USDRUB, USDTRY, USDZAR, equally well equally the various pairings of the major currencies with the Norwegian and Swedish Crowns (NOK and SEK).
The MACD Histogram we shall use today is a customized indicator which has the MACD histogram bars, as well as the fast and ho-hum moving boilerplate lines. The MACD Histogram has been coded with an ability to detect divergences equally well equally moving boilerplate cross signals within the indicator, which can and so be practical on the charts. These signals are automatically placed by the indicator once the setups have been spotted. Therefore, all you need to do is to place the indicator on the selected currency pairs, and allow information technology to deliver the signals to you.
The indicator is available as a gratuitous download from the MQL5 Community website.
Currency Pair Option
The use of exotic currency pairs here is deliberate. They are illiquid pairs which are not commonly affected by many of the common news events that go released daily. Furthermore, they tend to have very large moves and so tin can atomic number 82 to some bankable moves when using this indicator. So the exotic pairs mentioned could make for some very decent moves if the strategy calls are caught early on.
How does the strategy work?
The MACD indicator is an oscillator, merely tends to give tiresome signals which end up existence also late to work with when they occur. So the employ of a moving boilerplate crossover within the MACD indicator could assistance balance this out. This is why one signal is to use the divergence of the bluish line from the price candles. A divergence in this case is as follows:
- A) Price is showing lower lows while the indicator’due south blue line is showing higher lows. Lines are drawn by the indicator to showcase the divergence. In this case, the divergence is expected to correct by price eventually heading upwards to right this divergence.
- B) Price is showing higher highs when the MACD histogram’due south blueish line is showing lower highs. Hither, the divergence will correct when price eventually follows the indicator’s signal by moving lower. The MACD histogram will automatically depict lines to show the divergence.
This is the way the indicator works. Usually the indicator will signal an arrow in the trade direction: a green arrow for a long trade and a red arrow for a short merchandise.
At that place will also be occasions that the indicator will need two or 3 tries to get a signal. These are the occasions where you need to filter the signals to ensure you accept the correct setup going.
- A) You can also add a filter by ensuring that the starting time top in the lower highs, or the first trough of the MACD histogram used in checking for the divergence signal is style into overbought and oversold territory on the indicator window respectively. This increases the chances of non having a fakeout.
- B) Check the price level: is there a major support or resistance that you can reference the nowadays price position on? The closer price is to a previous resistance (for negative difference and a short trade), or to a previous support (positive deviation and a long trade), the better the chances of success.
- C) More importantly, if the blue line crosses the reddish line before each lower high or college low that the MACD histogram makes, this increases the chances of success.
At present that the rules are in place, let is look at the merchandise scenarios.
The short merchandise setup is as follows:
- A) Price is showing higher highs and the MACD histogram is showing lower highs.
- B) The indicator will trace the relevant lines and point a red arrow in the trade direction, which is downwards.
- C) Confirm the trade past checking to see if the toll is at a previous resistance, or close to information technology.
- D) Confirm that the first peak of the MACD histogram forming the lower high is at a greatly overbought level.
- East) Check that the blue line has crossed the red line in the MACD histogram window.
- F) If these three filters are in place, execute the short trade.
- G) Fix the stop loss above the high price of the previous resistance and utilize the next support as the initial profit target. Use a risk-advantage ratio that is at least 1:3.
Here is the chart snapshot showing this setup every bit well equally the application of the various filters in place.
MACD Histogram Departure: Sell Setup
Hither, we can encounter that the blue line of the MACD histogram crossed the blood-red line of the histogram earlier each pinnacle occurred. The price was showing higher highs while the lower lows of the indicator was well overbought. Similarly, the price setup occurred at a previous resistance expanse. We also run into that at that place was a well-defined previous support, which helped secure the Accept Profit surface area.
The presence of a previous resistance on which the Sell entry was anchored, also as a previous support for the merchandise exit, provided a good way to gauge the 1:iii take chances-reward ratio, providing the needed balance to gauge profitability.
Nosotros also run into a second setup which did not run across all the filtering criteria, and every bit we tin can see from subsequent cost action, that setup did not practice well.
The long trade setup is as follows:
- A) Cost is showing lower lows and the MACD histogram is showing higher lows.
- B) The indicator will trace the relevant lines and point a dark-green arrow in the trade direction, which is up.
- C) Confirm the merchandise by checking to see if the cost is at a previous support, or close to it.
- D) Confirm that the first trough of the MACD histogram forming the higher depression is at a greatly oversold level.
- E) Check that the blue line has crossed the cerise line in the MACD histogram window before each low.
- F) If these three filters are in place, execute the long trade at the open of the next candle.
- G) Prepare the stop loss below the low price of the previous back up and use the next resistance as the initial profit target. Use a take a chance-reward ratio that is at to the lowest degree 1:3.
Here is the chart snapshot showing this setup as well every bit the application of the various filters in place.
MACD Histogram Divergence Strategy: Purchase Setup
Hither, we tin come across 2 setups that met all the criteria and turned out well, and one that did not meet the filters and which did non end up well. The failed signal showed a situation where the MACD’s blue line failed to consummate the 2nd cross in skilful fourth dimension, which negated the point.
The first two worked out well with previous support areas to anchor the long entries. The blue line crossed the red line before each trough and all in oversold areas.
Practise this strategy and learn to identify the filters and use them earlier whatsoever trades are made.