MACD intraday strategy

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The MACD or Moving Average Convergence/Divergence Indicator is one of the fundamental indicators among the traders. The indicator originates from the radio science and shows a tendency excluding noise.

Strategy

MACD intraday strategy is a simple trend following strategy, based on the MACD indicator only. There is a well-known view that the MACD indicator can give false signals when the market is in a quiet phase. This strategy refers to the trend-following strategies. Thus, one of the core rules for this strategy – do not trade during quite periods. The core of the strategy is based on simple principle – the indicator shows trend direction, trades in the trend direction are opened after confirmation signal.

MACD Indicator itself consists of two parts: differential line and the signal line. The differential line is the difference between Fast EMA and Slow EMA. It measures the spatial relationship of this two Exponential Moving Averages and shows local trend direction, isolated from the global movements and noises. The signal line is a Simple Moving Average of the Differential line, crossings of this lines shows trading signals. When the MACD line crosses from the bottom-up the signal line, it is looked at as a signal to BUY. When MACD crosses the signal line from the top to bottom, it is often considered as a signal to SELL.

MACD intraday strategy 1

The picture shows MACD(12, 26, 9) Indicator on the EURUSD 15 min chart. Two EMA lines: the blue line is Slow EMA (26), the red line is Fast EMA(12). The MACD histogram itself represents the difference between this lines. The red line on top of the Indicator is the Signal line; it is a nine period SMA (9 of the MACD histogram.

Setup

  • Any trading instrument is suitable
  • For the intraday trading, we recommend using 15 min timeframe
  • Install on chart MACD Indicator with inputs: Fast EMA = 12; Slow EMA = 26; MACD SMA = 9

Entry rules

A concept of “confirmation signal” is introduced in this strategy. The rule is simple, for the trend following strategy we can not make a trade immediately after a signal, the more so the MACD indicator often gives false signals. So after the trading signal, we wait for the confirmation signal, which occurs when the trend has formed and then we make a trade. Stochastic line %K is below oversold level 20 – waiting for Buy signal confirmation.

Therefore, we define Trading signal – MACD crosses Signal line; Confirmation signal – MACD crosses the zero level.

Rules for the Buy trade:

  • MACD line is below the zero level and crosses the Signal line from the bottom up – Trading signal for the Buy
    • MACD stays above the Signal line and crosses the zero line from the bottom up – Confirmation signal for Buy

Rules for the Sell trade:

  • MACD line is above the zero level and crosses the Signal line from the top to bottom – Trading signal for the Sell
    • MACD stays below the Signal line and crosses zero line from the top to bottom – Confirmation signal for the Sell

MACD intraday strategy 2

Here depicted trading Sell signals followed by a confirmation signal.

Exit rules

Initially exit rules underlie evaluation and installation of the Stop Loss and Take Profit levels.  For most intraday strategies this rules will be similar.

Stop Loss

There are several rules to evaluate Stop Loss, which underlay different risk levels. Usually, Stop-Loss set to the support levels and pivot points. These rules are listed for the Buy signal, for the Sell signal rules should be vice versa.

  • Closest lower Pivot Point
  • Minimum of the last bar (Suitable for the high time frames, 4h, 1D, 1W)
  • Minimum of the current day
  • Weekly support level
  • Minimum of the current week
  • Current Price – k* ATR (Average True Range show average price motion; k between 2 and 5)

Take Profit

Take Profit is the desired level of profit and must correlate with Stop Loss level. One of the most important indexes of the strategy is relation SL/TP. This relation is called risk/reward level of the strategy.  (rules are for the Buy signal):

  • Last Pick (Visual Pick of the price for the reasonable period)
  • Closest upper Pivot Point
  • Maximum of the last bar (Suitable for the high time frames, 4h, 1D, 1W)
  • Current price + k*Standard Deviation (Standard Deviation indicator stands for an average price motion; k between 0.5 and 1)
  • Current price + k*ATR (ATR – average true range, calculated on a different principal than Standard Deviation; k between 0.5 and 2)

Early exit rules

During manual trading, it is very useful to consider Early exit rules. With such rules trader will have a chance to determine if predicted scenario is no longer valid, then exit a trade in reasonable profit or minimal loss. In addition to the rules of Trailing-Stop trader can use MACD Indicator itself; it gives a fairly reliable signal of the trend end.

For the trailing stop:

  • The size of the Trailing-Stop depends on the timeframe and amplitude of the market noise. Reasonable trailing stop for 15 min timeframe of the EURUSD: 10 – 30 pips

For the MACD trend end signal:

  • For a Buy signal
    • MACD crosses Signal line from top to bottom
  • For a Sell Signal
    • MACD crosses Signal line from bottom up

Examples

MACD intraday strategy 3

This picture shows signals of the strategy. All trades closed by the Early exit rules.

As pictured, the strategy not always gives profitable signals. It is crucial to avoid low volatile, ranging periods on the market.

Trading time

MACD intraday strategy relies crucially on the trading time.  Choosing highly volatile periods for trading with this strategy is critical. Therefore, the trader should rely on fundamental economics to predict good periods for trading.

There are two simple things that every trader can use.

Firstly, one should always remember about trading sessions. The forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session. Alternatively: Oceania session, Asian session, Europe session, America session. During every trading session, corresponding banks and companies are the most active on the market. For example, EURUSD will be most active during Europe and Asian trading session. USDJPY has the highest volatility, respectively, during the Asian and American trading sessions.

Secondly, there are many variations of Economic Calendars around the net. Such calendars contain all scheduled economic events and news. The study of this calendars will help one to determine volatile periods on the markets and choose correct trading instruments for trading.

Time for trading sessions:

EDT GMT EDT summer time GMT summer time
Sydney open

Sydney close

4:00 PM

1:00 AM

9:00 PM

6:00 AM

6:00 PM

3:00 AM

10:00 PM

7:00 AM

Tokyo open

Tokyo close

6:00 PM

3:00 AM

11:00 PM

8:00 AM

7:00 PM

4:00 AM

11:00 PM

8:00 AM

London open

London close

3:00 AM

12:00 PM

8:00 AM

5:00 PM

3:00 AM

12:00 PM

7:00 AM

4:00 PM

New York open

New York close

8:00 AM

5:00 PM

1:00 PM

10:00 PM

8:00 AM

5:00 PM

12:00 PM

9:00 PM

 

Pros

Simple strategy; useful for intraday trading; works well during trending periods.

 

Cons

The strategy has fairly big lag in comparison to trend-reversal strategies; works only during trending periods.

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