The moving average and MACD indicators are excellent for identifying forex market trends and momentum. When trend trading, we can give our forex strategies an edge by being on the right side of the market. This means that we can catch some big market moves from the start, provided we time our entry which can be done using price action analysis. In this guide I will look at a simple moving average and MACD strategy that you can use to analyse all of your favourite currency pair charts and timeframes to find actionable forex signals.
What is the moving average?
The moving average is probably the most popular forex trading indicator. It can be used to decide if we will be looking for long (buy) or short (sell) trades. When price is above the moving average, the market is considered to be in an uptrend. If price is below the moving average, then price is considered to be in a downtrend. Some traders will use a double moving average crossover as an entry or exit signal.
A simple moving average (SMA) is an arithmetic moving average calculated by adding recent prices and then dividing that figure by the number of time periods in the calculation average. The most popular simple moving averages include the 10, 20, 50, 100 and 200. Traders often use the smaller, faster moving averages as entry triggers and the longer, slower moving averages as clear trend filters.
What is the MACD?
The moving average convergence divergence (MACD) is a momentum and trend indicator that turns two moving averages into oscillators. It is composed of two exponential moving averages (EMA) and a histogram. When the MACD crossover happens above or below the signal line or zero line, this can be an entry or exit signal. MACD divergence can also be used to confirm trend direction and momentum.
The MACD is calculated by subtracting the 26-period (7.5%) exponential moving average from the 12-period (15%) moving average. The nine-period (20%) exponential moving average of the MACD line is used as the “signal” line. This is based on the default MACD settings (12, 26, 9), which we will be using for this moving average and MACD strategy.
How to trade the moving average and MACD strategy?
Whilst both of these indicators are useful on their own right, we can improve our entry signals by combining them both together. When price is above the moving average, we will look for MACD crossover signals to time our entry into the uptrend. When price is below the moving average, we will look for MACD crossover signals to time our entry into the downtrend. We can keep an eye on important support and resistance levels for further confirmation. I also like to use candlestick patterns to better time the entry.
- Price is above the 200 moving average
- MACD histogram crosses above signal line
- Price breaks resistance or bounces from support
- Bullish price action
In the USD/JPY 4-hour chart below you will see that all of the conditions have been met for a moving average and MACD strategy sell trade. Price has just broken through a strong resistance level at the same time it is above the 200 SMA. The MACD main line is above the signal line and zero line. We have bullish price action including a large green engulfing bar and three white soldiers candlestick pattern. The stop loss could have been placed just below the resistance level at around 20 pips or so. The USD/JPY currency pair continued for over 1,400 pips upwards after this entry which presented ample opportunity to take profits. The 200 SMA could have been used as a trailing stop which would have caught a good chunk of this strong uptrend.
- Price is below the 200 moving average
- MACD histogram crosses below signal line
- Price breaks support or bounces from resistance
- Bearish price action
You can see on the USD/JPY 4-hour chart below that we had a good MACD and moving average strategy setup. Price had just fallen below the 200 SMA which is a strong bearish indication. The MACD also crossed below the zero line and signal line, which confirmed the downwards market sentiment. There was some bearish price action including a shooting star candlestick pattern. However, the most important part of this move was when the price breached that strong support level. You can see the impact this had by the large red bar. The USD/JPY fell quite significantly after that. If we had taken the entry on this breakout, we could have placed a stop loss just above the support level which would have been around 20 pips. The price went down over 1,100 pips which means this is an excellent trade with a great risk to reward ratio. There were even a few more MACD sell signals on the way down, see if you can spot them on the chart.
Moving average MACD strategy Pros & Cons
- Catch some big forex market trends
- Get into important market moves early
- Easy to understand trading signals
- Can be combined with other indicators
- Any currency pair and chart timeframe
- MACD and moving average indicators are free
- Takes lots of practice to master
- Requires good timing for entry and exit
- Need to confirm each buy or sell signal
MACD vs moving average
The MACD and moving average are 2 of the most popular technical indicators for identifying the trend direction of a particular currency pair. However, the moving average is limited to showing you whether the market is moving up or down. On the other hand, the MACD can help to measure the momentum of the trend and also provides you with optional entry and exit signals. I think they can work well together but as they do similar things, you might want to include additional technical indicators and always keep an eye on price action.
Conclusion: is it worth trading forex with the moving average and MACD strategy?
Yes, I think combing the moving average with the MACD indicator can enable us to catch some big market moves. They are both capable of spotting market trends whereas the MACD is good for helping to tim the entry into these trends.
However, I do feel that the strategy requires confirmation by analysing price action. You will also need good forex money management as this can be the difference between a winning and losing forex strategy. If you use a wide stop loss, you can wipe out all of your gains with one bad trade. This can undo weeks or months of trading. I would be looking to cut my losing trades short but let my winners run. I might lock in a winning trade at break even point and trail the remainder of the position using the 200 SMA.
If you think that the moving average and MACD strategy is something that you would like to try, you could always test it out on a demo account to see how things go. You can get a free forex demo account from most forex brokers, including IC Markets who have tight spreads and low fees for trading forex. I would always practice any forex strategy on demo at first in order to understand how it works and see if it produces good results before making any 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.