Coloured MACD Indicator Explained

Definition of the Coloured MACD Indicator

The coloured MACD indicator is a momentum indicator which is an altered version of the traditional MACD indicator. The indicator is built to recognize trend changes on the currency pair and indicate this by means of a colour change in its histogram bars. The aim of introducing this colour recognition is to allow the MACD histogram recognize trend changes earlier than the conventional method of a cross from negative to positive and vice versa. The MACD indicator tends to lag; merely waiting for a cross from one territory to another will lead to delayed signals and missed profits.

2toneMACD

The coloured MACD indicator is available on the MQL5 community where it can be downloaded for free by clicking here.

Usage of Indicator

In forex, the colour coded MACD indicator can be used in a number of ways. From the numerous strategy articles we have on this site, it is evident that this indicator is a very important indicator.

  1. a) The coloured MACD indicator can be used in trend detection, usually as a component of a strategy or in conjunction with other trend indicators such as the Parabolic SAR or moving averages.
  2. b) The indicator also serves as a momentum indicator. The height of the coloured bars show how strong a trend movement is, and can also indicate if a move has gone too far and is about to undergo correction or reversal.

Indicator Settings

There is really no need to adjust any settings on the indicator window. Perhaps the only setting worthy of adjustment is the two colours that make up the colour-change identification system. It is suggested to leave the down signal colour as red and the up signal colour as blue. However, traders who want to conduct historical studies may have to make some other adjustments as follows:

1) Number of Bars

Some older versions of this indicator which pre-date the launch of the MT4 Build 600 have limited number of bars. If you for instance, want to look at the performance of the indicator four years back, you have to increase the number of bars by manually changing the figure to at least 1,000,000. This is done using the indicator pop-up window.

3)  Line Thickness

For better visualization, you will also need to thicken the bars of the indicator. This can be done by calling up the indicator on the Indicator List (Ctrl + I) -> Edit-> Colours -> Width. Then choose the desired line thickness from the drop-down menu.

2toneMACD_edit

To attach this indicator to the chart, you do the following:

  1. Open the MT4 chart.
  2. Click File -> Open Data Folder (very important step)
  3. In the data folder, click on the MQL4 sub-folder.
  4. Click on the “Indicators” subfolder.
  5. Attach the MQL4 file of the indicator.
  6. Restart the MT4 platform. The indicator is now located in the Custom indicators folder.
  7. Click Insert -> Indicators -> Custom -> MACD 2tone colour indicator

Usage of Envelopes in Forex Trading

How is the 2tone coloured MACD indicator used in forex trading?

a) Trend Identification

The envelope is used in identifying a new trend using a colour change. Blue colour stands for uptrend, red colour stands for downtrend.

b) Trading Strategies

Perhaps the most famous use of the coloured MACD indicator is as a component of trading strategies which are trend-based. On its own, the MACD indicator is incapable of producing signals that can be traded directly. The indicator must be incorporated as part of a trading strategy where it serves as a confirmation of either upside or downside move.

There are many strategies we have featured here on Investoo.com which have used the indicator at one point. Feel free to go to the Forex Strategies Course section to refresh your memory.

Trade Example
Step 1

Open the chart of the currency to be traded and setup the coloured MACD indicator as described earlier. Adjust the colours and bar characteristics to make the indicator components more visible.

Step 2

Determine the strategy that you want to trade and apply the other relevant indicators. Sometimes, you can also use the indicator along with candlesticks or chart patterns to trade. When any of these patterns have setup trade opportunities, use the coloured MACD indicator to produce confirmation for these strategies.

Make sure you practice how to trade each setup on a demo account before using the indicator to trade real money. Also pay attention to risk management.

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