How to combine the Indicators?
Some trading strategies aim to catch strong trends, even though they ignore short-term insignificant price fluctuations. An average trade duration is usually in a range between 5 and 10 working days, or 1-2 weeks. These types of trading methods would be suitable for small accounts and inpatient traders as they suggest a more significant level of potential drawdown as per short-term trading systems, as well as comparatively long-term forecasting and analysis. Strong trends do not appear too often, so the shortest timeframe to consider the study is a 4-hourly chart. Sometimes traders even enlarge the scope, looking at daily and weekly charts to find attractive entry levels. This type of strategy is called swing trading.
As long as we are seeking strong trends to catch, we need powerful trend indicators to be used. Although the nature of direction technical indicators suggests a large number of factors instead to monitor, most of them have a disadvantage of lagging. Nevertheless, trend indicators have much lower false signals than fast oscillators, for example. At the same time, slow indicators might point to reversal or confirming signals in market conditions which would be entirely ignored by other technical tools.
How to use combined indicators ADX and MACD
ADX plus MACD Forex Trading System is based on a combination of such technical tools as described above. The Moving Average of Convergence and Divergence is a multi-purpose tool, showing the current trend’s direction and pointing to reversal likelihood. The main reversal pattern occurs when MACD lines cross each other, while the histogram’s level whether confirms or denies the current trend momentum. Reversal bearish divergences happen when MACD lines chart consecutive lower highs, while the price has higher highs on the chart. Bullish reversal divergences occur when the opposite condition is met - price charts lower lows, but MACD lines draw higher lows. That’s a compelling signal for a current trend to reverse the direction.
The second indicator is the ADX and DI, pointing to trend momentum as the main factor of analysis. Once a MACD signal occurred, the second entry condition is related to ADX main line, which has to be above the threshold of 25. -DI and +DI lines will indicate the trend direction. In our case, we need -DI to be below the +DI line for long positions. The opposite pattern has to confirm a short position where -DI line appears above the +DI line.
If you like this strategy, you might also be interested in this Best Stochastic Settings
Exit conditions are often different depending on risk appetite, money management rules and the depth of the account balance. Assets also matter as GBP/JPY has a higher volatility than EUR/USD, therefore, the stop-loss order depth has to be much more significant in the first case. We would not recommend putting too deep stop losses, and always keep the profit/loss ratio positive. The trailing stop would be the most effective tool to use for taking profits from dominant trends.