Macd Trendline Strategy

Today we’ll look at one of the strongest and simplest trend-following trading strategies built on technical analysis: the MACD-with-trendline strategy. It relies mainly on trading in the direction of the overall market trend, combined with the MACD indicator, which needs no introduction. MACD appears in many trading strategies, especially day trading and scalping. See also our guide to EUR/USD Trading Strategy.

What the MACD-with-trend strategy needs

All you need for this strategy is the MACD indicator on its default settings.

Timeframe used

You can use it on any timeframe from the 30-minute up to the daily. In this walkthrough we’ll use the daily timeframe.

Strategy rules

We’ll apply this strategy in five steps.

1 – Wait for the MACD line to form a peak followed by a lower peak

The first rule is to wait for the MACD line to form a peak higher than the previous one, then follow it with a lower peak. At the same time you’ll notice price has formed the same peak. See the chart above.

2 – Connect these peaks with a trendline

This step is very simple. See below how your chart should look after you connect the peaks on the price chart and on the MACD and join them with a trendline. Remember we draw the trendline on the candle closes, not the wicks, so we ignore the wick of the second peak on the chart.

3 – Wait for the MACD line (blue line) to break the trendline we just drew

When the MACD line (blue) crosses the signal line (orange), it’s a sign the uptrend may be starting, but it isn’t a strong enough signal to enter a buy. We’ll wait until the MACD line (blue) breaks the trendline we drew a moment ago.

The reason we wait for the MACD line to break the trendline is to avoid as many false signals as possible, so be as patient and disciplined as you can.

Read also: Best Bitcoin trading strategy in 5 steps

4 – Set the stop-loss

Now that we’ve entered a buy, you should set a stop-loss to protect your account from any sudden market conditions. In the MACD-with-trend strategy we place the stop-loss below the lowest low the price reached, and to avoid false breakouts you can place it 5 to 10 pips below the last low.

5 – Take profit when the MACD line crosses the signal line downward

Now we come to the last step: setting the take-profit. Knowing the right time to take profit is no less important than knowing when to enter a trade. In the MACD-with-trend strategy we take profit on the first MACD signal indicating a change of direction: when the MACD line (blue) crosses the signal line (red) downward, you can consider closing the buy.

But don’t rush and take profit the moment the MACD line crosses the signal line downward. Wait until the four-hour or daily candle closes (depending on the timeframe you’re trading) to confirm the crossover is valid.

Note: the above was an example of buy trades using the MACD-with-trend strategy. For sell trades we use exactly the same rules but in the opposite direction. The chart below shows an example of sell trades using the MACD-with-trend strategy.

Conclusion

The MACD-with-trend strategy is a straightforward approach that follows the direction of the market. Whether you’re a beginner or already have trading experience, trend-based strategies are among the simpler methods to apply, though no approach removes the risk of losing trades.

In the MACD-with-trendline strategy it’s important to identify strong entry points, and this is done through the breakout. For price action to count as a breakout, the candle must move above the resistance trendline and close above it, or drop below the support trendline and close below it. Once the breakout happens, you can open the trade at the open of the next candle.

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