The BB MACD Trading Strategy is a trend and volatility-based trading system that is designed to benefit from uptrends in which prices tend to make new highs or downtrends in which prices tend to make new lows. This technique is built on Moving Average Convergence and Divergence, a trend and momentum indicator, and Bollinger Bands, a volatility indicator.
What is the BB MACD Indicator?
The BB MACD indicator combines two popular technical analysis indicators: Bollinger bands (BB) and Moving Average Convergence Divergence (MACD). Bollinger bands are two bands that are one below and one above a moving average. The width of the bands varies in relation to the volatility of the market price. The MACD is a trend detection indicator. It denotes the relationship between two market price moving averages. The indicator represents market momentum. The MACD oscillates up and down in response to a signal line. The Bollinger bands in the BB MACD indicator reflect the intensity of the trend, while the MACD indicates the direction of the trend.
BB MACD Strategy
The MACD line is calculated by subtracting the long-term moving average from the short-term moving average of price data. When the MACD line is above zero, it signifies that the short-term moving average is higher than the long-term moving average, indicating an uptrend. When the MACD line is below zero, it signifies that the short-term moving average is lower than the long-term moving average, indicating a market downtrend. Furthermore, the slope of the MACD line is a critical momentum indicator. When the slope of the MACD line is up, the BB MACD indicator shows green dots, and when it is down, it plots purple dots.
Bollinger Bands are price envelopes displayed at a standard deviation level above and below the price’s simple moving average. However, in this indicator, the envelopes are plotted on the MACD line rather than the Moving average. Bollinger bands aid in determining market volatility. The squeezing occurs when both bands come together with the mid-MACD line. A squeeze indicates low volatility in the market, and when the MACD line breaks out of the Bollinger bands, traders could consider it a potential sign of future rising volatility and probable trading opportunities.
Buy Signal
The following could be your checklist for a buy trade:
- When the MACD line moves above the zero level.
- When the color of the MACD Indicator turns green.
- When the MACD Indicator gives a breakout from upper band after a BB Squeeze.
Once these events occur:
- You could open a buy position after the MACD breakout, and you confirm your entry with bullish candlestick patterns.
- You could set your stop loss just below the nearest swing low.
- You could set your take profit at the nearest resistance zone, or you could exit trade when the MACD indicator turns purple in color.
- For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Sell Signal
The following could be your checklist for a sell trade:
- When the MACD line moves below the zero level.
- When the color of the MACD Indicator turns purple.
- When the MACD Indicator gives a breakout from lower band after a BB Squeeze.
Once these events occur:
- You could open a sell position after the MACD breakout, and you confirm your entry with bearish candlestick patterns.
- You could set your stop loss just above the nearest swing high.
- You could set your take profit at the nearest support zone, or you could exit trade when the MACD indicator turns green in color.
- For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
BB MACD Pros & Cons
Pros
- The BB MACD Indicator aids in recognizing trend transition points and determining the strength of the present trend.
- The indicator predicts entry and exit levels and can be used on all timeframes.
Cons
- The BB MACD Indicator may require additional knowledge of price action to be able to utilize the indicator properly.
- There could be false signals generated and the color change may sometimes be a mere trend correction rather than a trend reversal.
Conclusion
The BB MACD Indicator is a two-in-one technical tool which is useful to traders who belong to all levels of experience, and it is quite easy to understand. This indicator is a trend-following and momentum indicator which can be used by different kinds of traders including scalpers, day/intraday traders and swing traders, but they also must be aware that there is no profit guarantee. You can always practice trading on a forex demo account to begin with to improve your trading skills and build up your confidence.
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