The MACD is one of the most popular technical indicators for trading forex. It can be used to identify market trends and momentum, producing buy and sell signals on all of your favourite currency pairs and chart timeframes. Whilst many traders think the MACD histogram crossing the zero line is a good strategy, the MACD histogram crossing the signal line can also be a strong trading signal when used correctly. I will take a look at both of the MACD crossover strategies in this guide to help you understand them and implement them within your trading strategy.
What is the MACD?
The moving average convergence divergence (MACD) is a technical indicator that shows the relationship between two moving averages of an asset’s price. Its purpose is to reveal changes in a trend’s direction, strength, momentum, and duration in the underlying security’s price.
The MACD is calculated by subtracting the value of a long-period exponential moving average (EMA) from a short-period EMA. Both moving averages use closing prices of the period that is measured.
How to trade the MACD zero-line crossover strategy
The MACD crossing above zero is considered bullish, whilst the MACD crossing below zero is bearish. This is the simplest way to trade the MACD crossover but does mean that you can enter the trend later than if you were using the MACD signal line crossover which we will look at below. Regardless of the MACD crossover strategy you decide to use, I would always be sure to confirm entry with at least one other technical indicator such as Bollinger bands and price action analysis.
Buy signal
- MACD crosses above zero
- Confirm entry with additional indicators (optional)
- Analyse price action on charts (optional)
- Enter long (buy) position
You can see from the EUR/USD 1-hour chart below that the MACD crossed over the zero line whilst there was a Bollinger band breakout to the upside. Price had also breached recent resistance and there is a bullish three white soldiers candlestick pattern. This all confirmed a long trade with possible stop loss options being the middle Bollinger band or just below the recent support level. This trade would have made over 200 pips and counting. Optional exit points could have been the price crossing below the lower band or an opposite MACD crossover signal.
Sell signal
- MACD crosses below zero
- Confirm entry with additional indicators (optional)
- Analyse price action on charts (optional)
- Enter short (sell) position
In the EUR/USD 1-hour chart below, you can see that there was a MACD crossover of the zero line to the downside and price breached the lower Bollinger band. There is a bearish evening star candlestick pattern and three black crows candlestick pattern. The stop loss could have been around 50 pips at the middle Bollinger band which gives a very good risk to reward ratio as the trade went on to make over 200 pips.
How to trade the MACD main and signal line crossover strategy
The MACD has 2 lines, the main line and signal line. When the main line crosses the signal line upwards, this is considered a bullish (buy) signal. If the main line crosses the signal line downwards, this is considered a bearish (sell) signal. Again, I would not take these MACD crossover signals blindly, but would instead confirm them with other market analysis. This can help to filter out some of the false signals.
Buy signal
- MACD main line crosses above signal line with histogram below 0
- Confirm entry with additional indicators (optional)
- Analyse price action on charts (optional)
- Enter long (buy) position
In the EUR/USD 1-hour chart below, you can see that the MACD main line has crossed the signal line in an upwards direction and the MACD histogram is below 0. Then the RSI indicator is showing the market is oversold and the RSI divergence suggests upwards momentum. The price has formed a level of support which would have been a good place to put a stop loss just below. This trade went on to reach almost 300 pips which is quite impressive considering the tight stop loss.
Sell signal
- MACD main line crosses below signal line with histogram above 0
- Confirm entry with additional indicators (optional)
- Analyse price action on charts (optional)
- Enter short (sell) position
On the EUR/USD 1-hour chart below you can see that the MACD main line crossed the signal line downwards whilst the histogram is above 0. The RSI indicator (14) is also indicating an overbought market. Price has reached resistance whilst the candlestick patterns are suggesting indecision in the market. This all leads to a reversal trade which went on to make around 350 pips. What’s great about this trade is it would have been fine with a 20 pip stop loss which is a good risk to reward ratio.
What are the best MACD settings?
The MACD indicator is free to use in most forex trading platforms, including MetaTrader 4/5. The default MACD parameters are “12, 26, 9”. The 12 represents a moving average of the previous 12 bars. The 26 represents a moving average of the previous 26 bars. The 9 represents a moving average of the difference between the two moving averages above.
I personally stick to the default settings as I believe they are set that way for a reason. If you were to reduce the parameters, the MACD would be more sensitive and you would get more signals. However, this can reduce the quality of signals. On the contrary, if you were to increase the MACD settings, you might get less signals that are more reliable as they take into account more price data. The flip side being that these signals may then be lagging.
The same principle applies to chart timeframes. From my experience, using the MACD crossover strategy on any timeframe below the 1-hour charts can lead to more false signals. You would certainly need to be filtering each MACD crossover with further market analysis if you plan on using the 1-minuite, 5-minute and 15-minute charts. Another thing worth considering is that you would need to spend less time checking the charts when trading the higher timeframes which can be useful if you have limited time to dedicate to forex trading.
MACD crossover strategy Pros & Cons
Pros
- Can work on any currency pair and timeframe
- Combines well with different technical indicators
- Easy to spot on the MACD indicator
- Can be used for entry and exit signals
Cons
- Sensitive to price on lower timeframes
- Need to try and filter out false signals
- Requires good money management
Conclusion: is the MACD crossover strategy any good?
Yes, I think it is a very good forex strategy when combined with other technical indictors and analysis of price action. That does mean that it can take some practice to find out which combination of indicators work best according to your own trading style. You will also need to ensure your forex money management is on point as this can make or break any trading system.
A forex demo account can be a good way to practice trading the MACD crossover strategies and build your confidence up. When you start seeing some long-term results, you could always consider making the switch over to a real trading account. You can get a free demo account from most forex brokers, including IC Markets who are one of my top choices for manual and automated forex strategies.
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.
