The Deviation MACD Forex Strategy

Introduction

At first glance, this strategy looked too simple to be true. But backtests have shown that they work exceedingly well when used on 4 hour and daily charts. This is one of the simplest strategies you can ever come across. It makes use of one simple moving average indicator as well as the native MACD indicator to detect short trend change moves. Several trades can be taken within a three-week time frame.

Trades are taken on all currency pairs, but on the 4hour and daily time frames. This ensures that good profits are made on profitable trades. In addition, the fact that the trade is taken at the middle Bollinger band allows the trader to set a very tight stop loss, thereby giving the trade a good risk-reward ratio.

Indicators
The indicators for this strategy are as follows:

  1. 5-day simple moving average applied to close (change colour to improve visualization).
  2. MACD indicator, set to 6,15,1.
  3. Bollinger bands indicator with default settings.

The Strategy

We will be looking for a situation where the 5-SMA indicator snakes its way within the Bollinger bands, persistently crossing the middle Bollinger upwards and downwards to correspond exactly with then the MACD indicator bars also cross from negative to positive and back. The zero mark on the MACD indicator corresponds to the point where the 5-SMA crosses the middle Bollinger band.

Long Trade
The Long trade setup occurs when:

  1. The 5SMA crosses the middle Bollinger band upwards.
  2. At the same time, the MACD indicator bars cross from negative to positive. The point at which the cross occurs at the zero mark corresponds with when the 5SMA crosses the middle Bollinger band.

We demonstrate this trade setup in the snapshot below:

DevMACD_long

The snapshot shows a unique situation where there were several trade scenarios that occurred over a period of several weeks. The key is to make sure that the trade entry is made exactly soon after the 5SMA has crossed the middle Bollinger band to the upside, with confirmation from the MACD indicator. This is one strategy that can provide a lot of pips, considering that the trade was taken on a daily chart. However, it requires a lot of patience on the part of the trader.

Stop Loss

The stop loss is set at a few pips below the middle Bollinger band.

Take Profit

The Take Profit is set at the level of the upper Bollinger band. Once price hits the upper Bollinger band, exit the trade.

Short Trade
The Short trade setup occurs when:

  1. The 5SMA crosses the middle Bollinger band downwards.
  2. At the same time, the MACD indicator bars cross from positive to negative. The point at which the cross occurs at the zero mark corresponds with when the 5SMA crosses the middle Bollinger band.

We demonstrate this trade setup in the snapshot below:

DevMACD_short

In this snapshot taken from the 4hour chart, we see the price action crossing the middle Bollinger band at the same time that the MACD crosses from positive to negative.

Stop Loss

The stop loss is set to a few pips above the middle Bollinger band.

Take Profit

The Take Profit level is set to the price level of the lower Bollinger band. Therefore, the trader should observe the trade manually and exit the trade on attainment of this milestone.

Conclusion

This strategy performs very well in a trending market, and less so in a range-bound market. Therefore, trades made on currency pairs that tend to trend, or on assets listed on certain forex platforms such as the stock indices or gold, will do very well with this strategy.

This strategy can be used as a stop-and-reverse-strategy, with long and short trade setups being traded on an alternate basis as they set themselves up on the chart. So a trader can take a long trade, wait for the price to reverse off the upper Bollinger band, and allow the short trade setup to occur before trading that as well. The reverse trade can also be performed from short to long and back to short trades.

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