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MACD Pullback Trading System - Learn How That Works

Author: Consultant Finmaxfx
It often happens that traders miss an initial spike of a price, especially when strong trends start on the unexpected fundamental trigger. Entering on the top/bottom of the market isn’t a good idea as such positions might dive deep under the water, testing stop-loss orders’ depth and threatening to turn into a loss instead of a profit on sustainable price action. The best trading approach, in this case, is to wait for a pullback, implementing the buy-dips or sell-highs strategy depending on the direction of the price action. However, the biggest question is how to determine the depth of such a retracement? Is the current movement just a technical retracement or complete reversal? What would be potential stop-loss orders, and how could the profit/loss ration be assessed?

What is a MACD Pullback System

MACD Pullback Forex Trading System is based on swing trading technique as it is based on medium-term trends, while short-term fluctuations are ignored. Two timeframes are suitable for the system - four-hours and one-day charts are considered to catch a strong trend as shorter timeframes aren’t worth the risk involved. The trading strategy is simple and reliable, and it uses only two technical indicators, even though they are widely used and well known. MACD slow trend indicator is the primary tool to provide trading signals, and the exponential moving average with the period of 50 bars is the additional one. Moving Average of Convergence and Divergence is not just a simple indicator to show the trend’s direction or oversold/overbought levels as traditional oscillators do. That’s a whole system with a multi-layer way of calculations and scientific conclusions. It has a histogram, which points out the market’s momentum; Singal and MACD lines, which indicate different market conditions. Crossover and the distance between those lines are crucial for the technical analysis, showing perfect entry or exit moments. The exponential moving average is a popular technical tool, having a smooth formula, which allows avoiding false price whipsaws. At the same time, EMA50 is quite a long-term curve, indicating the trend’s direction and retracement levels to find support or resistance. Both indicators are used with default settings. If you like this strategy, you might also be interested in this Forex Candlestick Patterns Strategy

What is a Pullback in Trading

The main idea of a pullback trading strategy is that the bulls (for an uptrend) or bears (for downtrend conditions) often get current prices too far from average quotes, and at some point, momentum is getting exhausted. The opposite market reaction starts weighing on rates, which turn back to positive average ratings, testing support/resistance before accelerating the price action in the same direction as the first movement. What happens to the MACD indicator is that Signal and MACD lines cross each other on a pullback, but the general sentiment remains positive for an uptrend and negative for a downtrend. Once the second crossover occurs, with the condition that EMA50 indicates the same direction, we enter the market.

Conditions for Opening Long and Short Positions

Conditions for long positions can be described as follows. We have three stages of an action. First, the MACD line breaks the zero level from below during the initial spike. Second, a bearish crossover occurs when the MACD line crosses above the Signal line. Third, both lines cross each other again, while the high of the corresponding bar is still above EMA50. We open long positions on the close of the corresponding candlestick.

Short positions are the same but with the mirrored relation to the price. Similar stages happen during the initial and continuation price actions. First, the MACD line appears below the zero line after staying above it earlier. Second, the Signal line edges above the MACD line, pointing to a rebound where we start looking for an entry point. Third, a bearish crossover happens, while the current bottom of the bar remains below the EMA 50 curve. We go short once the trigger occurs.

Using a Take Profit Order

Setting take-profit orders is an individual case, which depends on several factors such as trading strategy, money and risk management rules, the asset to trade on, and so on. Further action of the MACD indicator has to be monitored when exiting the market. Once the indicator sends a different signal, positions should be closed manually. Trailing stops are applicable. An example of the MACD Pullback Forex Trading System in action is shown on a chart below. It’s worth also noticing that the strategy works well with any assets, including slow-moving and high-volatile currency pairs. We chose GBP/USD and the four-hourly timeframe.

Pullbacks typically don’t change the underlying fundamental narrative that is driving the price action on a chart. They are usually profit-taking opportunities following a strong run-up in a security’s price.
MACD Pullback Trading System
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