Being more flexible to adapt with market changes is a must if traders want to profit form such volatile markets as Forex and Commodity, and they can start by combining the BB with a leading indicator, for instance, Moving Average Convergence Divergence (MACD).
How to combine the best Indicators?
The idea using the Forex indicator combination Bollinger Bands with the MACD is to avoid being confused when market conditions become unobvious. The Bollinger bands indicator only works best in ranging market. It presents bullish signals when prices approach the lower band, and bearish signals when prices reach the upper band. However, when market begins to trend, traders will suffer from tremendous losses if they follow Bollinger bands indication. Of course, if a trader is proficient enough in using the BB indicator, he can define whether the market condition is changing or not. Unfortunately, most traders fall into the trap of following “buy low, sell high" signals generated by the bands, especially Forex beginners.
The MACD itself is an effective trend-following momentum indicator. It contains a histogram and two moving average lines, enabling traders to identify and follow market trends. If traders combine the Bollinger bands with the MACD, they will be able to realize whether market is either trending or consolidating and, profit from both conditions.
How to use combined indicators Bollinger Bands and MACD?
This system could work well on various charts, from 15-minute to 1-day. Traders will have to observe the performance of the Bollinger Band indicator and MACD moving averages to confirm trading signals.
When prices continually touch the lower band of the BB indicator for a long time then start to rally, traders will take a look at MACD performance. Once the MACD line crosses above the signal line (or the MACD histogram turns above the 0.0 level), a bullish signal is confirmed.
Conversely, when prices constantly touch the upper band of the BB then start to retrace, and the MACD line crosses below the signal line (or the MACD histogram turns below the 0.0 level), traders can go short the currency pair.
There is a note when trading with this system. Traders have to wait for the candlestick to close before confirming the MACD crossovers valid.
The stop-loss level could be set 30 pips away from the entry point. The best take-profit point is when prices touch the other band of the BB indicator.
Pros and cons of the system
- Avoid serious losing streaks;
- Providing more accurate signals;
- Enabling traders to profit from both consolidating and trending market conditions.
- Requiring traders to constantly observe the charts.
If you like this strategy, you might also be interested in this Parabolic Sar Settings
Forex markets are getting more and more imponderable, requiring traders to be more and more flexible. Combining the MACD with the Bollinger Bands indicator is a perfect way to adapt with market changes. However, don’t forget that there is no 100% winning system, no matter how well it’s developed. Traders must have prior knowledge of technical analysis, fundamental analysis, risk control and psychological if they seriously want to profit from Forex trading.