Forex Swing Trading Strategy # 3: (MACD Swing Trading System)

The MACD (moving average convergence divergence) technical indicator is the brainchild of Gerald Appel. Through the years, many people have tried to find the best MACD settings for swing trading, day trading, position trading and the best setting for each market.

Let’s clear something up: There is no best setting for any trading indicator.

What may catch turns in the market of today may miss them tomorrow.  Anybody that tries to sell you some secret Forex MACD settings that catches 90% of the move is trying to rip you off.


Some quick points about the MACD indicator

  • MACD can be used as a trend indicator depending on rleationship of MACD line and signal line
  • MACD can be used as momentum indicator either using the histogram or seperation of lines.
  • MACD can be used to spot a bullish divergence or bearish divergence
  • There are no oversold or overbought zones with MACD.  You can use stochastic oscillator if those are important to you.




On this chart, when the blue line is over the red line (signal line over MACD line), we are in an uptrend.  Red line over the blue line would give us an uptrend.

The greater the spacing between the lines shows an increase in momentum.  It is simply one short term moving average pulling away from a longer term moving average.

Some traders will use the red histogram as to show momentum.  A rising histogram means upside momentum and a declining histogram is downside momentum.

Bearish divergence will show up when price action is making higher highs but the MACD histogram is not.  On the flip side, bullish divergence is where the MACD histogram (or lines) puts in higher lows but price put in a lower low.

Watch price action and current price structure to indicate a change in price direction.


MACD Trading Swing Trading Strategy For Forex

Our MACD trading strategy is going to use trend lines and your ability to spot a MACD divergence in the market.  You will have to have some skill in technical analysis as you don’t want to simply trade any trading indicator blindly.

Our MACD parameters for swing trading would be the same if we were going to day trade this strategy.  Here are the chart requirements for this swing trading strategy:

  1. We will use the default settings of 12, 26, 9
  2. We will use the 1 hour and 4 hour chart plus the daily chart time frame
  3. Any currency pair is worthy of a test

Catching the turn using divergence adheres to how Soros thinks of reversals



MACD Strategy Outline

  1. Watch for price making a new swing high or swing low.
  2. Draw a trendline connecting the two swing highs or swing lows
  3. Scan the MACD histogram if you can spot a divergence.

If you spot a short entry and potential sell signal

  • Is there divergence?
  • Wait for currenct candlestick to close and place sell stop order below the low of the candlestick
  • Place your stop loss 5-20 pips above the high of the candlestick

If you spot a long entry and potential buy signal

  • Is there divergence?
  • Wait for current candlestick to close and place buy stop order above the high of the candlestick
  • Place your stop loss 5-20 pips below the low of the candlestick

Take Profit Targets Options

  • 3 times the amount you risked.
  • 3 times the distance from the trough (pullback/retracement) to the new swing high (for a short entry) and opposite for long entry.
  • you can also have the option of using fibonacci to calculate profit targets


Trade Entry Confirmation with Reversal Candlesticks

For more refinement of your trade entries, the use of reversal candlesticks may become very handy when used as confirmation for entries:

For Short Entries:

  • dojis
  • inside bar
  • dark cloud
  • shooting star

For Long Entries:

  • dojis
  • inside bar
  • hammer
  • piercing line

Notice in the short trade setup on the chart below, an inside bar forms right after the new swing high was formed(by the green candlestick) but in which the MACD histogram showed a new swing low indicating a potential decreasing momentum.

macd bearish divergence for swing trade

Bearish Divergence. Possible MACD swing trade

The formation of this inside bar reversal candlestick gave the added confirmation to take this short trade.

Here is how that setup worked out

successful macd trade

Successful MACD strategy trade


Disadvantages of the MACD Swing Trading System

  • MACD is a lagging indicator, therefore there will be times when the price has moved a long way before MACD shows it.
  • Divergence may not be very accurate, the reason being that prices generally has a tendencey to burst up or down that knocks out your stop loss orders forcing you out of a trade before it either falls or goes up and this sustained price move may have given you a good profit but you are out of that trade.
  • Its pretty hard to spot the setup when its happening and this may be true for new swing traders but even experience traders would too.
  • Trading with the MACD system pretty much goes against what the trader is seeing in reality on his charts and causes a lot of confusion on should he pull the trigger and also on when to pull the trigger.

For a trader looking for a short trading setup, all his see on his chart will be much more green candlesticks than red and he knows that the market is in an uptrend because a new swing high is made but then he looks at his MACD histogram which indicates that a New Swing Low is made.

Now the swing trader looks at the price chart and thinks: “…how can I sell when the market is going up and if I sell, what is the best time to get in?”  I believe this will always be a problem for the MACD swing trading strategy but remember, most people fail at trading.  Some of the best trades you will ever take are the ones that make you the most uncomfortable!


The Good of The MACD Swing Trading Strategy

  • If the trading setup works perfectly, you have the potential to be on a trade at the very right time meaning you would have entered a short trade at the very top or a long trade at the very bottom of a swing.
  • The use of reversal candlesticks may be used as a trading confirmation and here’s how: after a divergence trading signal is given, just wait for a reversal candlestick to form and then enter your order to go long or short.
  • Forex swing trading is a hands off trading method and since Forex is one of the best trending markets, there is a lot of potential for many pips.

Did you enjoy this? It would mean the world to me if you shared it:

You can leave a response, or trackback from your own site.

Leave a Reply