There are many forex indicators to choose from, with the MACD being one of the most popular when it comes to spotting market trends and measuring momentum. The Ichimoku indicator on the other hand is not used by as many forex traders, probably because they might not understand how it works and the benefits that it can provide. In fact, the Ichimoku can be a great additional technical analysis filter to combine with the MACD for a more complete forex strategy. In this guide I will look at a simple MACD and Ichimoku strategy that you can use to analyse all of your favourite currency pair charts and timeframes to find actionable forex signals.
What is the MACD?
The moving average convergence divergence (MACD) is an oscillator indicator that is widely used by forex traders for technical analysis. The MACD is a trend-following tool that utilizes a combination of moving averages to determine the trend direction and momentum of a particular currency pair.
The MACD crossover strategy is a simple forex strategy that involves looking for buy trades when the MACD histogram crosses above the signal line or zero line. If the MACD crossover happens below the signal line or zero line, we would look for sell trades. We can also use MACD divergence to try and gauge the strength of a market move.
What is the Ichimoku?
The Ichimoku Kinko Hyo, or Ichimoku for short, is another technical indicator that is also used to gauge trend direction and momentum along with potential support and resistance levels. Trading forex with the Ichimoku cloud trading attempts to identify a probable direction of price. It helps the trader determine the most suitable time to enter and exit the market by providing you with the trend direction. The Ichimoku Cloud was developed by Goichi Hosoda, a Japanese journalist, and published in 1969. It has been used by traders and investors ever since, to identify the direction of market trends.
The Ichimoku Cloud indicator can be used on any time frame, there is no best timeframe as everyone is different. It all depends on what type of trader you are. Day traders might prefer to use the Ichimoku on the 5-minute or 15-minute chart to help them identify the trend and/or get entry and exit signals. Other traders like myself might prefer the 1-hour chart and above as they can filter out some of the noise from the lower chart timeframes. Then you have swing traders who are quite happy to trade on daily charts and above because they are holding positions for the long term.
MACD and Ichimoku Strategy
Now we know what both of these indicators do, we will combine the signals of both to confirm or entry into currency pairs. If the MACD and Ichimoku agree that there is an uptrend, we will look to place a long (buy) trade. If they agree that there is a downtrend, we will look to place a short (sell) trade. However, I wouldn’t take these signals blindly without first doing some additional market analysis. I would always keep an eye on price action for any significant candlestick patterns to time my entry into the trend. This can help to avoid buying high and selling low.
Buy signal
- Tenkan-sen is above the kijun-sen line
- Price has broken out of the chikou span line
- There is a bullish kumo (ichimoku cloud)
- MACD histogram is above the signal line
- MACD divergence to the upside
- Bullish price action
You can see in the USD/JPY 1-hour chart below that the MACD and Ichimoku strategy was able to catch a big uptrend from the beginning. All of the buy signals had been met with some strong bullish price action including a large green engulfing candlestick pattern following some market indecision as evident by consecutive doji bars. Price has breached a resistance level that has now become a support level. The MACD has crossed the signal line whilst the Ichimoku is looking very bullish. We could have placed the stop loss just below the new support level which would have been around 20 pips. That’s not bad when you consider this trend went up for over 670 pips. There was lots of opportunity to take profits along the way. We could have used the Ichimoku cloud as an area for a trailing stop loss which would have caught the majority of this particular trend.
Sell signal
- Tenkan-sen is below the kijun-sen line
- Price has broken out of the chikou span line
- There is a bearish kumo (ichimoku cloud)
- MACD histogram is below the signal line
- MACD divergence to the downside
- Bearish price action
In the USD/JPY 1-chart below, all of the conditions have been met for a sell trade based on the Ichimoku and MACD strategy. We have seen that the MACD has crossed the signal line in a downwards direction and is gathering some momentum. The Ichimoku cloud is ticking all of the bearish box. Importantly, we can see that price has breached through a strong support level that was holding up well prior to the breakout. This would have been a good time to enter into this downtrend, as confirmed by the three black crows candlestick pattern. We could have placed the stop loss on the other side of the support level and just above the kijun-sen line. This would have been only around 10 pips. That is a very tight stop loss for a trade that went on for over 120 pips. This gives a very favourable risk to reward ratio which means that one bad trade will not cancel out a run of winners.
MACD Ichimoku Pros & Cons
Pros
- Catch some big market moves from early
- Detect and confirm the trend direction and momentum
- Can be combined with other technical indicators
- Can be used on any currency pair and chart timeframe
- MACD and Ichimoku indicators are free to use
Cons
- Quite complex to read all of the Ichimoku signals
- Not the easiest forex strategy for beginners
- Can take some time to practice to master
- There will still be false signals
MACD vs Ichimoku
These are 2 of the most popular forex indicators for when it comes to discovering the direction a currency pair is trending in. They both can not only tell you if the market is moving up or down, but they can also give you an idea of the momentum left in a move. However, I find the Ichimoku to be slightly complex with many different signals to look out for. The MACD on the other hand, is much more straight forward and therefore probably preferably for beginners. In saying that, if you learn to master both and combining them together, you can get extra confirmation on your trades.
Conclusion: is it worth trading forex with the MACD and Ichimoku strategy?
Yes, if you have the time to learn a new forex strategy, then the MACD and Ichimoku indicators can work well together. However, they do show similar things so I think you will need to use additional market analysis to get the most out of them, specifically by studying price action. You could even use other technical indicators such as the RSI or CCI to look for overbought and oversold market conditions which can help us to get in to trends early rather than when its too late.
If you like the look of the Ichimoku and MACD strategy, you could always give it a try on a forex demo account. You can get a free demo account from most forex brokers that comes preloaded with virtual funds so that you can practice different forex strategies without taking any risk. I would always test any manual or automated forex system on a demo account to begin with. Once you have built up enough confidence, you could then consider making the seamless switch to a live account.
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.
