MACD strategy – Trend Line and MACD

As an oscillator, the MACD is commonly used to pick turning points in

the markets or used to time the entries into a trade. However, unknown
to most, the MACD oscillator can also help traders to plot trend lines
without the element of subjectivity being involved. In this article, we
outline a simple trend line trading strategy using the MACD oscillator.

To use this trading strategy, of course, traders need to make use of the
MACD oscillator, set to the default settings. We know that the MACD can
show turning points in the markets. It doesn’t necessarily have to be a
change in trend but merely the highs and lows that are formed with
price.

Once the MACD oscillator is applied to chart, look for tops and
bottoms in the oscillator and then using the ray or trend line tool connect
the highs or the lows.
The first chart below illustrates a rising trend line that is formed by
connecting the two higher lows being formed. These lows coincide with
the MACD oscillator which forms the subsequent higher lows as well.

Rising Trend line – Using MACD Oscillator

In the next chart, we have a falling trend line which is formed by
connecting the two consecutive lower highs which are identified by the
two highs formed on the MACD oscillator.

Falling Trend line – Using MACD Oscillator

As you can see, plotting trend lines is a lot easier and simpler without
the need for any subjectivity involved. Now that we know how to plot
trend lines using the MACD oscillator, the next step is to define the
trading rules.
MACD – Trend Line trading strategy

To trade the trend line strategy with the MACD, traders need to have two
opposing trend lines. This marks the most important part of the trading
strategy. If you do not find the right MACD peaks and troughs pointing to
two opposing trend lines, then it is best to stay aside from the markets.
After the two opposing trend lines are formed, the next step is to wait for
a breakout from the trend lines. When prices breakout from the falling
trend line, long set ups are taken and when prices break the rising trend
line, short set ups are taken.

Once the set up is ready, the MACD once again acts as a trigger.

For long positions:

Wait for price to break the falling trend line
MACD Histogram should move from below 0-line to above 0-line
Buy on the Candle high with stops at the low
For take profits, either use the 14 period ATR or set the take profit to two
times the risk

Long Position Example – Trend line/MACD Example

In the above example, from the left, we first plot the rising trend line after
identifying the two consecutive higher lows being formed. At the same
time, we also spot two consecutive lower highs forming on the chart and
we plot the opposing falling trend line. Now that the set up is formed,
when the MACD crosses the 0-line, long positions are placed at the high
of the candle with stops set to the low. The take profit is set to two times
the range of the candle’s high and low which is the trigger candle. Prices
initially dips lower to the lower end of the range but then move out
strongly hitting the take profit levels with ease.
For short positions:

Wait for price to break the rising trend line

MACD Histogram should move from above the 0-line to below 0-line
Sell on the Candle low with stops at the top or the high of the candle
Take profits can be set to two times the risk or use the 14 period ATR to
book profits

Short Position Example – Trend line/MACD Example

In the next chart above, we show an example of a short set up. Here,
after plotting the trend lines, prices make a fake-out attempt from the
rising trend line. Normal traders would have purchased at this break out
but would have resulted in a losing trade. However, sticking to the
trading rules, here we take a short position on the candle’s low where
the MACD histogram crosses the 0-line. Take profit is set to two times
the risk which results in a quick profit.
The MACD trend line strategy is very simple to use and doesn’t require
too much of analysis. It offers a clean way to trade the markets and is
very subjective, making this a good trading strategy worth trading.