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MACD Moving Average Convergence Divergence

A few weeks ago I wrote an article on multiple time frames on my other blog and used and the MACD for the comparisons on 5 min and 30 min time frames. The purpose of the article was to demonstrate that by using different time frames, it was possible to get higher probability trades.

The trade I used for the example seemed to work well so I continued to watch it over the few days as it was not a strategy I used on a daily basis. Here are some of the trades based on the strategy the last few days.

I have used a standard 12, 26, 9 MACD without a histogram as well as a 21 exponential moving average for the trades.

The 30 min chart is used to determine the trade direction and the 5 min chart is used to enter the trade and either buy the dips or sell the peaks according to the direction of the 30 min chart.

Click to enlarge the charts


At 14:30 on the 15th April the MACD Crossed long on the 30 min chart and the first candle opened above the 21 EMA at a price of about 196.00.


The 1 hr chart shows the cross long of the MACD on the 15 th of April at 13:00. I would have preferred a 2 hr chart as the 30 min and 1 hr charts used together can sometimes be confusing. My software does not have a 2hr time frame but for the most part the 1 hr chart worked well for these trades.



The above chart shows the 5 min MACD crossed long at just about the same time as the 30 min chart. By buying the dips and leaving the shorts we had 3 good trades over the following few hours. We could have left the original buy and let it run until the 30 min chart indicated a possible reversal.

Even though the MACD crossed back and forth during the early phase the candles remained above the 21 EMA on the 30 min chart indicating the long was still in tact.




The next 30 min cross was on the 17th April at 10 am, the 5 min chart confirmed at 10:15 when the MACD crossed and the candles opened above the 21 EMA. The first trade produced 200 pips before a reversal and the second entry another 200 pips.



The next cross was on the 18th at 7:30am on the 30 min chart and at about 7:40 the candles on the 5 min chart crossed above the 21 EMA which was our signal to enter the market long at 203.73. Price continued to rally for the rest of the day ending about 500 pips up 208.97.

The trend change came on the 21st when the MACD crossed short and the first candle opened below the 21 EMA confirming the 30 min cross at 9:30. The 5 min cross which happened at 8:50. already confirmed the short trade. Price continued down for about four hundred pips.

This bring us to today's trade where the confusion of using the one hour and 30 min charts together is evident. The 30 min chart had crossed long on the MACD last night and opened above the 21 EMA at about 10: am confirming the earlier cross on the 5 min chart. Again the strategy produced a good rally of two to three hundred pips.

The stop loss is placed below the last low or high on the 5 min chart prior to the candle opening above the 21 EMA. The swings on the GBP/JPY can be quite large so the stop can at times be 50 pips or more.

The 1 hr chart however remains down in spite of about a 180 pip rally. I suppose had their been a histogram the 1 hr would still have been above the zero line confirming the direction.

I have deliberately removed the histogram to give an earlier signal rather than wait for the cross above the zero line.

Summary

1. Use the 30 min MACD no histogram cross to confirm the direction of the trade.
2. Wait for the 5 min MACD to cross and the first candle to open above or below the 21 EMA before entering the trade in the direction of the 30 min chart.
3. As long as the 30 min MACD remains in the same direction stay with the trade.
4. Use the 21 EMA as support or resistance on the 30 min chart to trail the market with a stop loss and lock in profits.
5. Place initial Stop loss above or below the last high or low prior to the cross of the 21 EMA on the 5 min chart
6. Use the previous highs or lows or pivots for profit targets on the trades.
   
   

Trading with the Laguerre indicator and Daily Pivot Points

Often we need confirmation that price is likely to move in a particular direction. For this trade I have used daily Pivot Points and the Laguerre RSI indicator.

The Laguerre RSI was introduced by John Ehlers in his book “Cybernetic Analysis for stocks and futures” It uses a Laguerre filter to provide a “time warp” so that the low frequency components are delayed more than the high frequency components, enabling much smoother filters to be created using less data.

I typically use the Laguerre RSI to buy when the line crosses 0.15 and sell when price crosses 0.85. The price damping factor can be customized for optimal use to best suit the trade instruments data by altering the gamma factor usually between 0.55 and 0.85. The lower the Gamma factor the faster more aggressive the entry. The scale is -0.5 to 1.05.

To learn more about Pivot points see my previous article.This trade and all the settings are done using Meta Trader Charting

Laguerre Settings
Common:- -0.05 1.05Inputs:- Gamma 0.55 Count Bars 9500 Levels: - 0, 0.85, 0.45 0.15

I am also using a Laguerre filter as a visual aid which can be downloaded off the net. Currency GBP/JPY Time frame 15 min at the opening of the Euro trading session.

On the above chart we enter the market short at 239.24 when the 1st candle closes below the Laguerre 0.55 Filter line. The blue Laguerre RSI also crosses short through our 0.85 line. This cross occurred just below the Daily Pivot point.

Our 1st target is the pivot point Support 1 area, then the PP Support 2 Area. Our Stop loss is placed at 239.45 above the Pivot Point 18 pips from our entry. The S1 is almost 100 pips below so this makes it a very good risk to reward trade.

As we can see the market continued down to S1 for our 1st target at 238.28 for close to 100 pips profit. Next Chart The market retraced a bit from S1 but failed to rise back to the Pivot Point then dropped all the way to S2 and below for about 200 pips profit on the trade. The Laguerre RSI flattened out at the bottom long before the price bottomed out signifying that the trend was still in tact so we could stay short till the line crossed above 0.15 to go long.

Note also the cross long through the 0.15 Laguerre and above the Laguerre 0.55 filter line signaling a long entry targeting the S1 Pivot Area.

Always keep in mind your risk management. Try to limit your risk to 1 or 2% of your capital. If the stop loss is to large for your capital then rather give the trade a miss or enter with fewer lots.
Whilst I am using the Laguerre on 15 Min it is suitable for most currencies on most time frames.

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Pivot Point Trading Strategy

The pivot point trading strategy has been around for many years, originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.The pivot point is the level at which the market direction changes for the day. By using simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels.These points are collectively known as pivot levels!Every day the market has an open, high, low and a close for the day. Forex markets are open 24 hours a day 5 and a half days a week.

We use 5pm EST as the open and close. This is all the all the data you need to calculate the pivot levels. The reason pivot point trading is so popular is simply because pivot points are predictive rather than lagging. The information from the previous day is used to calculate potential turning points for the current day you are about to trade.Because so many traders use pivot points the market generally reacts at these levels thus creating trading opportunities. The theory is that if the market opens above the pivot point then the bias for the day is long for as long as the price remains above the pivot point. If the market opens below the pivot point then the bias for the day is to stay short for as long as the market remains below the pivot point. The most important pivot levels are R1, S1 and the actual pivot point.

The general idea behind trading pivot points is to find a reversal or break of R1 or S1. By the time the market reaches R2, R3 or S2, S3 the market will generally be overbought or oversold and these levels should be used to exit the market rather than enter the market.A good set up would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on the break
of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

If we look at the above 1 hr GBP/USD chart we can see the open and close of Friday, 12 Oct. The blue line is the pivot point, The Green lines the resistance areas and the red lines the support areas. These specific pivot points are automatic and update my charts daily. Pivot point calculators are freely available on the web. Go to the following; http://www.fxstreet.com/forex-tools/pivot-point-calculator/ to download a free pivot point calculator. If you want auto pivots for the meta trader charts then log onto http://www.forexmt4.com/ and look for free pivot points that update automatically on your charting everyday.

As we can see the market opened below the daily pivot therefore the initial bias should be to look for a short opportunity until the pivot point is breached.

Breakout Trade

If we look at the above chart we can see the market formed a bit of a channel between the S1 and pivot point. I have added in the up and down Trend lines. The price tested the S1 pulled back then failed to penetrate the resistance or down trend line to go higher. With the opening of the European market price broke below the support and uptrend line. We enter the market just below the S1 with the opening of the down candle at 2.0304 our stop is placed just above the previous high at 2.0335 a 31 pip stop. With a 31 pip stop we need to target at least a 31 pip profit target, preferably 46 or more pips with no more than 2% of our equity. As our S2 is only 20 pips away and no guarantee that price will break through that area this might not be the best trade from a risk reward point of view. Or you can go to a 5 min chart to check the last high on that for a more aggressive stop loss.

In this case the market actually stopped just 4 pips short of the S3 target for a 59 pip run down. Even though this is a predictive trading method bear in mind for targeting that support and resistance is an area not necessarily a specific number. In this case the price had 2 attempts to hit the target of 2.0241 but failed. Rather bank the money in this case than let the market retrace all the way back to S2. Also when S2 was hit then move your stop to break even. If you were in the market with more than 1 lot you could have closed half the position when you were 31 pips up on the trade. As there are many ways to trade pivot points let’s see how the day continued and if there were any further pivot trading opportunities on the day.

If we look at the following setup then we see we have a new current down trend line and I have added a relative strength indicator with a setting of 34. When price breaks through the down trend line we can place an order above S2 Targeting S1 and Pivot point. Again the stop is 35 pips so we need to target at least 35 to 70 pips on the trade. Again the distance between S1 and S2 is only 27 pips so we need to consider this trade carefully from a risk reward point of view. In this case the market easily went all the way to the pivot point 64 pips above at 2.0354 from an entry of 2.0287. Note also that the RSI indicator crossed the 50% line confirming the buy. Again we could have closed half our position at 35 pips up and brought our stop loss to break even.

The sudden spike down due to a US fundamental could just as easily have continued down and turned a good trade into a loser had we not done this. For those who want the maths for the pivot point calculations here it is. Start with calculating the pivot point first. As you can see by having the previous days high, low and close we can calculate 7 points of support and resistance.

Resistance 3 = High + 2*(Pivot - Low)Resistance 2 = Pivot + (R1 - S1)Resistance 1 = 2 * Pivot - LowPivot Point = ( High + Close + Low )/3Support 1 = 2 * Pivot - HighSupport 2 = Pivot - (R1 - S1)Support 3 = Low - 2*(High - Pivot)