In theory, trend tradingis easy. All you need to do is keep on buying when you see the pricerising higher and keep on selling when you see it breaking lower. Inpractice, however, it is far more difficult to do successfully. Thegreatest fear for trend traders is getting into a trend too late, that is, at the point of exhaustion. Yet despite these difficulties, trend tradingis probably one of the most popular styles of trading because when atrend develops, whether on a short-term or long-term basis, it can lastfor hours, days and even months.
Here we'll cover a strategy that will help you get in on atrend at the right time while at the same time giving us clear entryand exit levels. This strategy is called the moving average MACD combo. (For background reading, see A Primer On The MACD.)
Overview
The MACD combo strategy involves using two sets of moving averages (MA) for the setup:
- 50 simple moving average (SMA) - The signal line that triggers the trades.
- 100 SMA - Gives a clear trend signal.
The actual time period of the SMA depends on the chart that you use.This strategy works best on hourly and daily charts. The main premiseof the strategy is to buy or sell only when the price crosses the moving averages in the direction of the trend. (To learn more, read the Moving Averages tutorial.)
Rules for a Long Trade- Wait for the currency to trade above both the 50 SMA and 100 SMA.
- Once the price has broken above the closest SMA by 10 pips or more, enter long if MACD has crossed to positive within the last five bars, otherwise wait for the next MACD signal.
- Set the initial stop at a five-bar low from the entry.
- Exit half of the position at two times risk; move the stop to breakeven.
- Exit the second half when the price breaks below the 50 SMA by 10 pips.
Rules for a Short Trade
Wait for the currency to trade below both the 50 SMA and 100 SMA.
- Once the price has broken below the closest SMA by 10 pips or more, enter short if MACD has crossed to negative within the last five bars; otherwise, wait for the next MACD signal.
- Set the initial stop at five-bar high from entry.
- Exit half of the position at two times risk; move the stop to breakeven.
- Exitthe remaining position when the price breaks back above the 50 SMA by10 pips. Do not take the trade if the price is simply trading betweenthe 50 SMA and 100 SMA.
Long Trades
Our first example in Figure 1 is for the EUR/USDon an hourly chart. The trade sets up on March 13, 2006, when the pricecrosses above both the 50-hour SMA and 100-hour SMA. However, we do notenter immediately because MACD crossed to the upside more than fivebars ago, and we prefer to wait for the second MACD upside cross to getin. The reason we adhere to this rule is because we do not want to buywhen the momentum has already been to the upside for a while and may therefore exhaust itself.
Thesecond trigger occurs a few hours later at 1.1945. We enter theposition 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 targetgets hit at 11 a.m. EST the next day. We then move our stop tobreakeven and look to exit the second half of the position when theprice trades below the 50-hour SMA by 10 pips. This occurs on March 20,2006 at 10 a.m. EST, at which time the second half of the position isclosed at 1.2165 for a total trade profit of 138 pips.
 | | Figure 1: Moving Average MACD Combo, EUR/USD | | Source: FXtrek Intellichart |
Positive and Negative Oscillations
Why can't we just trade the MACD cross from positive to negative? You can see by looking at the EUR/USDin Figure 2 that multiple positive and negative oscillations occurredbetween March 13 and March 15, 2006. However, most of the downside andeven some of the upside signals if taken, would have been stopped outbefore making any meaningful profits.
Why can'twe just trade the moving average cross without the MACD? Take a look atFigure 2. If we took the moving average crossover signal to thedownside when the MACD was positive, the trade would have turned into aloser.
 | | Figure 2 | | Source: FXtrek Intellichart |
The next example, shown in Figure 3, is for USD/JPYon a daily time frame. The trade sets up on September 16, 2005, whenthe price crosses above both the 50-day and 100-day SMA. We take thesignal immediately because the MACD has crossed within five bars,giving us an entry level of approximately 110.95. We place our initialstop at the five-bar low of 108.98 and our first target at two timesrisk, which comes to 114.89. The price is hit three weeks later onOctober 13, 2005, at which time we move our stop to breakeven and lookto exit the second half of the position when the price trades below the50-day SMA by 10 pips. This occurs on December 14, 2005, at 117.43,resulting in a total trade profit of 521 pips.
One thingto keep in mind when using daily charts: although the profits can belarger, the risk is also higher. Our stop was close to 200 pips awayfrom our entry. Of course, our profit was 521 pips, which turned out tobe more than two times our risk. Furthermore, traders using the dailycharts to identify setups need to be far more patient with their tradesbecause the position can remain open for months.
 | | Figure 3: Moving Average MACD Combo, USD/JPY | | Source: FXtrek Intellichart |
Short Trades
On the short side, we take a look at the AUD/USD on hourly charts back on March 16, 2006. The currency pairfirst range trades between the 50- and 100-hour SMA. We wait for theprice to break below both the 50- and 100-hour moving averages andcheck to see whether MACD has been negative less than five bars ago. Wesee that it was, so we go short when the price moves 10 pips lower thanthe closest SMA, which in this case is the 100-hour SMA. Our entryprice is 0.7349. We place our initial stop at the highest high of thelast five bars or 0.7376. This places our initial risk at 27 pips. Ourfirst target is two times the risk, which comes to 0.7295. The targetgets triggered seven hours later, at which time we move our stop on thesecond half to breakeven and look to exit it when the price tradesabove the 50-hour SMA by 10 pips. This occurs on March 22, 2006, whenthe price reaches 0.7193, earning us a total of 105 pips on the trade.This is definitely an attractive return given the fact that we onlyrisked 27 pips on the trade.
 | | Figure 4: Moving Average MACD Combo, AUD/USD | | Source: FXtrek Intellichart |
From a daily perspective, we take a look at another short example in EUR/JPYshown in Figure 5. As you can see, the daily examples date farther backbecause once a clear trend has formed, it can last for a long time. Ifit didn't, the currency would instead move into a range-bound scenario where the prices would simply fluctuate between the two moving averages.
OnApril 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 thatmomentum has moved to the downside. We enter into a short position at10 pips below the closest moving average (100-day SMA) or 137.76. Theinitial stop is placed at the highest high of the past five bars, whichis 140.47. This means that we are risking 271 pips. Our first target istwo times risk (542 pips) or 132.34. The first target is hit a littlemore than a month later on June 2, 2005. At this time, we move our stopon the remaining half to breakeven and look to exit it when the pricetrades above the 50-day SMA by 10 pips. The moving average is breachedto the top side on June 30, 2005, and we exit at 134.21. We exit therest of the position at that time for a total trade profit of 448 pips.
 | | Figure 5: Moving Average MACD Combo, EUR/JPY | | Source: FXtrek Intellichart |
When the Strategy Fails
Thisstrategy is far from foolproof. As with many trend-trading strategies,it works best on currencies or time frames that trend well. Therefore,it is difficult to implement this strategy on currencies that aretypically range bound, like EUR/GBP.
Figure 6shows an example of the strategy's failure. The price breaks below the50- and 100-hour SMA in EUR/GBP on March 7, 2006, by 10 pips. The MACDis negative at the time, so we go short 10 pips below the movingaverage at 0.6840. The stop is placed at the highest high of the pastfive bars, which is 0.6860. This makes our risk 20 pips, which meansthat our first take-profit level is two times the risk, or 0.6800.
EUR/GBP continues to sell-off,but not strongly enough to reach our take-profit level. The low in themove before the currency pair eventually reverses back above the50-hour SMA is 0.6839. The reversal eventually extends to our stop of 0.6860 and we end up losing 20 pips on the trade.
 | | Figure 6: Moving Average MACD Combo, EUR/GBP | | Source: FXtrek Intellicharts |
Conclusion
The movingaverage MACD combo strategy can help you get in on a trend at the mostprofitable time. However, traders implementing this strategy shouldmake sure they do so only on currency pairsthat typically trend. This strategy works particularly well on themajors. Traders should also check the strength of the breakdown belowthe moving average at the point of entry. In the failed trade shown inFigure 6, had we looked at the average directional index(ADX) at that time, we would have seen that the ADX was very low,indicating that the breakdown probably did not generate enough momentumto continue the move.
by Kathy Lien and Boris Schlossberg, |
发表于 2009-12-31 07:18
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