The Bollinger bands and MACD are excellent indicators in their own right. They can spot market trends, momentum, breakouts and reversals. Despite that, if you use them on their own, you might find that you get lots of false signals. We can help to overcome this by combining them together to filter their respective signals. In this guide I will look at a simple Bollinger bands and MACD strategy that you can use to analyse all of your favourite currency pair charts and timeframes to find actionable forex signals.
What are Bollinger bands?
Bollinger bands are a popular forex indicator for conducting technical analysis on currency pairs. They are made up of an upper and lower band, set either side of a simple moving average (SMA). Each band is plotted two standard deviations away from the SMA of the market, and they are capable of highlighting areas of support and resistance.
Narrow Bollinger bands suggest a ranging market whereas expanding bands suggest high market volatility. If price has a breakout through either the upper or lower bands, forex traders might look to trade the Bollinger bands breakout strategy or wait for a potential Bollinger bands reversal trade. However, it can be tough to decide which option would be best, which is why we can use other indicators such as the MACD to help make an informed decision.
What is the MACD?
The moving average convergence divergence oscillator (MACD) is a simple yet effective momentum indicator. The MACD indicator fluctuates above and below the zero line as the moving averages converge, cross and diverge. It calculates the difference between a 12 day and 26-day EMA using closing prices. A 9-day EMA of the MACD Line is plotted with the indicator to act as a signal Line and identify market turns.
If the MACD crossover happens above the signal line or zero line, this is considered a bullish signal. If the MACD crossover is below the signal line of zero line, this is a bearish signal. MACD divergence can also be used to gauge the current trend. The MACD can be handy for discovering currency pair trends and their momentum on any currency pair and chart timeframe.
How to trade the Bollinger Bands MACD strategy?
We will take the entry signals from both the MACD and Bollinger bands to confirm them together. They must both agree for a buy or sell signal to be valid. I always like to add further confirmation by analysing price action and looking for how price reacts around significant support and resistance levels. Entry points can be confirmed with candlestick patterns.
We are looking for price to breakout through the upper or lower band. Once this happens, we will use the MACD to confirm if we are going to buy or sell the currency pair. Following on from that, we will time the entry using price action analysis and make sure we have good money management in place.
Buy signal
- Price breaks out through lower Bollinger band
- MACD histogram crosses above signal line
- Price moves away from support or breaks resistance
- Bullish price action
In the EUR/USD 4-hour chart below, you can see that we had all of the signs for a buy trade based on the Bollinger bands and MACD strategy. The price had fell below the lower Bollinger band and bounced from a key support level that held up well. The MACD histogram was showing bullish momentum and crossed above the signal line. The entry was confirmed by bullish price action including a large green engulfing bar. A stop loss just below the support level would be around 40 pips which is very acceptable. This EUR/USD uptrend lasted for over 800 pips with a couple of re-entry points on the way up if you missed the first signal.
Sell signal
- Price breaks out through upper Bollinger band
- MACD histogram crosses below signal line
- Price moves away from resistance or breaks support
- Bearish price action
In the EUR/USD 4-hour chart below, you can see that we had all of the signs for a sell trade based on the Bollinger bands and MACD strategy. Price broke through the upper band but then formed a resistance level that it was unable to breach. Price then began to fall whilst the MACD histogram went below the signal line confirming the downtrend. There is also bearish price action in the form of a three black crows candlestick pattern. A stop loss placed just above the resistance level would have been around 40 pips which isn’t too bad when you consider that the EUR/USD price fell over 450 pips. There was plenty of chances to take profits on the way down.
Bollinger bands MACD strategy Pros & Cons
Pros
- Can catch some big forex market trends early
- Can be combined with other indicators
- Clear and actionable trading signals
- Adapt to different market conditions
- Any currency pair and timeframe
Cons
- Takes time to learn how to use it correctly
- Requires user initiative to time entry and exit
- There will still be false signals
MACD vs Bollinger bands
The MACD and Bollinger bands are 2 of the most popular forex trading indicators when it comes to technical analysis. The MACD can show you the trend direction and momentum whereas the Bollinger bands can also measure market volatility. Both indicators provide versatile entry and exit signals for trading breakouts and reversals. However, I think they work well when combined together as there may be too many false signals when using them standalone. They could also be complimented well with overbought or oversold indicators such as the RSI and CCI to help time your entry into the market.
Conclusion: is the Bollinger bands and MACD strategy worth trading?
Yes, I think that trading forex with the Bollinger bands and MACD together can produce some good signals. As you can see from the EUR/USD trade examples here, we were able to catch some big market moves by combining these technical indicators together. However, it does require some price action analysis to confirm signals and time entry. Otherwise, you may find there are too many false signals especially if trading on the lower chart timeframes.
You will also need to make sure you have very good forex money management as this can make or break any trading strategy. I have seen the same forex strategy give completely different results because of the stop loss and take profit being used. If you do not have a good risk to reward ratio, then it only takes one bad trade to wipe out a run of winners. This can be hard to sustain in the long run. I would look to cut my losing trades short but let winning trades run. A break even can be used to protect winning trades whereas a trailing stop loss can help to maximise the potential of each move.
If you think that the Bollinger bands and MACD strategy is something that you want to trade with, you could always try it out on a forex demo account to see how things go. You can get a free demo account from most forex brokers, including IC Markets who have quick execution speeds, tight spreads and low fees for trading forex. I would always practice any forex system on demo at first in order to get a feel for how it works and see if it produces the desired results before making any financial commitment.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
