MACD – How to Trade It

MACD trading strategy

Now that you know what MACD is and how to set it up, it’s time to add a few refinements.If you’ve watched it in real time, you’ve probably noticed that it sometimes gives false signals. Setting your stop loss can also be tricky. To avoid getting whipsawed, add one more indicator to the mix: a 7-period Weighted Moving Average.

Once you plot it, you’ll notice the price keeps drifting back to that MA and retesting it every so often.

Here’s this morning’s EUR/USD chart on the 3-minute timeframe.

Watch closely — the only signals worth taking are ones where the rate sits just below (for a sell) or just above (for a buy) the 7 Weighted Moving Average, shown as the yellow line on my chart. If the market is already running away from that level, don’t chase it. Wait.

Look at the last bar on this chart — that’s a data reaction, and you should not touch it. Not only is the rate too far from the MA, but a data reaction is unpredictable; you never really know how it will resolve. Stop trading about 10 minutes before major data releases, and only resume once price action returns to normal.

Patience matters here. Don’t rush to catch a trade. If it’s a good setup, it will come back to you a little later, so there’s no need to react the instant you see a MACD cross. You want to enter at a good price, on your own terms.

You’ll need to spend real time watching this in live markets to build a feel for it and learn when — and how — to react.

And remember: if you want to become a trader, no one and nothing can do that work for you. Put in the homework, and forget about “trading bots,” “signals,” and the other shortcuts you’ll find all over the internet. I can help make a trader out of every one of you, but only if you do the work and follow each step. There are no shortcuts.

The Recipe (3-Minute Chart)

MACD: 26-12-6 Weighted Moving Average: 7 Stop Loss: 1.5 pips (if your broker charges a spread, let me know the size so I can fine-tune this for you — mine runs at 0.0)

Profit Target:

• Fix it at 5+ pips, or
• Ride the move for roughly 15 minutes

This gives you a risk/reward better than 1:3, and on the right wave, up to 1:5. The win rate on this small system runs above 75%, so the odds are strongly in your favor.

Once you’re comfortable with this, I’ll show you how to re-enter the same wave when it runs longer than expected.