MACD(addy) Divergence System

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1

Hi all!
Just thought I’d share this system that I’ve been playing around with recently. It’s pretty simple and uses just two indicators and capitalizes on divergences. So far, results have been pretty good, especially when I’m able to catch a trend. I call it the MACD(addy) divergence system.


Indicators:

MACD: 12, 26, 9 – used for spotting divergences
Stochastic: 14, 3, 3 – used for confirmation

Entry Signals:

Entry signals are simple enough.

First, you wait for a divergence to form between price and MACD. That means:
If price is making higher highs, look for MACD to make lower highs.
Price = lower lows, look for MACD = higher lows.
Price = lower highs, look for MACD = higher highs.
Price = higher lows, look for MACD = lower lows.
I think the school of pipsology has a pretty good lesson on divergences

Second, Stoch has to have just crossed over from oversold/overbought territory. That means it has to have just crossed above 20 if you’re going long, and crossed below 80 if you’re going to short.

Exit signals:

To exit, you either close your position when stochs hits overbought/oversold, or you wait until price hits your PT or stop.

Stop loss and profit target placement:

This part is discretionary, completely up to you. The way I play it, I usually just place my stop above the closest resistance (if going short), or below the nearest support (if going long).

For trade management, I move my stop to breakeven when price moves in my favor by the same number of pips as my stop… so if my initial stop is 50 pips away, I will move my stop to breakeven when I’m +50 pips. You can also choose to have a predetermined # of pips so that when price is X pips away from your entry, you can move your stop to breakeven.

Here are some sample signals that turned out well. (Of course, like any other system, this also gives bad signals from time to time, but overall, it does more good than bad.)

I attached a my template too, in case any of you are interested in trying it out.

macd_stoch.zip (640 Bytes)

I’d love to hear your thoughts on opinions on this. thanks!

5 Likes
2

I’ll try this. Thanks for sharing

3

Lol love the name of the system. I love divergences. I’ll give this system a look!

4

Thanks guys! I’ll try to keep you guys posted on any signals that may come up.
Cheers!

5

thanks for sharing a good strategy. I would like to know what time frame do you ususally trade the paris for this set up?

6

I’ve only tried trading it on the 1H and 4H, so I can’t really say if it works well or not on other time frames. I like the 1H and 4H time frames because trends are easier to spot on them.

7

I know the MACD divergence signal alone is not enough to ensure a high probability trade. That reminds me a few steps that was suggest on a thread I read a while ago somewhere:

1- Wait for the Divergence signal (see image)
2- Be sure that price crosses a Trend line
3- Wait for price to cross a support / resistance level

Since Divergence means a change in the trend, waiting for the price to cross critical levels should be necessary. I like the idea of using Stochastic to confirm the entry, but as seen on the image, it would be better to wait for the cross of the support line.

For hidden divergence, which means a confirmation of the current trend, the technique should be the same.

1 Like
8

I like this strategy. How often does this trigger a trade? I’ve been using the 5 and 20 EMA to cross when, or close to a MACD cross and it works, but the use of divergence might help filter out some of the fake out signals.

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9

Here’s a setup I will follow closely on USDJPY 4HR. OSMA already showing divergence and MACD lines on the way to do the same if they cross up. My buy entry would be at the bottom horizontal red line wich shows a major resistance level. Stop loss level at the last swing low and profit level at 1:1 or higher. I am using the MTF Support and resistance (Barry) indicator) wich gives fractal level on higher timeframes. Let’s see what happens.

10

@snook: About 1-2 signals a week, if you use the 1H chart. I use it mostly for swing trading since I can spot trends easier that way.

@chamane: Thanks for the suggestion! I’ll give it a shot and I’ll let you know how it fares in the coming weeks. One question though, if you wait for price to cross a trend line and a support/resistance level, does that mean that you’re basically playing breakouts every time?

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Yes, it is more a breakout strategy than only rely on Stochastic to enter, although it can also be profitable.

12

Very interesting. :slight_smile: I’ve always had trouble trading breakouts myself. How/where do you set your stop losses and profit target? Can you explain how you manage risk? Thanks!

13

You can use whatever money management technique that suits you the best. I find one simple way is to take the last swing high/low as the stop loss level and the same number of pips as the profit level (see image). You can also bring the stop loss at the entry level + 5 pips when you reach 50% of the aiming profit.

14

excellent trade setup. please post any future setups/signals u get on macd divergence system. i think its so solid.

15

Thanks Halba!

Actually, we got a signal earlier on EURUSD. I’d say it’s still valid since price is still in the same area. Please see chart. :slight_smile:

16

But taking chamane’s advice, you may want to considering entering after price breaks below 1.4500 or that rising trend line.

17

hello. i am just newbie. it will take me some time to find the right strategy. but lately i like the simplicity of MACD approach. also on babypips advanced. it is good.

i just see the EURUSD macd, eur is tanking a bit, so it has weight.

18

There are plenty of systems/strategies out there, try em out and see which suits you best. :slight_smile:
so far, EURUSD seems to be complying with MACD(addy)'s signal. it’s back below 1.4500 now. let’s see how far it drops.

19

Yes, and doing so, you go “hand in hand” with technical analysis…
I’m tracking this pair with high interest since last Friday, when I entered short with two trades at 1.4335 (2011.07.22 14:48) assuming the price will fall… well, as you can see, since that date the price went very nice against me… I just hope that your confirmation, in relation with the technical one, will finally put an end to Euro’s rally and the pair will form the much anticipated lower high, coming from the daily chart.
Well soon see…
Congrats for your trading setup!

20

today what a solid strategy you posted jenesaisquoi

divergence detected @ a tick above 1.4512 or so. it is now 1.4360 and weakening! over 150 pips from this system in eur/usd only.

babypips is right - divergence is a very good way to get in early. in this case you get an early short entry -and the EURO tanked.

do you use a trailing stop? I would use a trailing stop EA to manage profit trades there are a few.

if you have a trailing stop, i would not exit this trade as potential is there to weaken further