Bollinger Bands + MACD

The “Bollinger Bands” (BB) is one of the most popular indicators, commonly used to detect signals from market consolidations. However, global financial markets don’t always trade in range. When trends appear, they overshadow the effectiveness of the indicators which lead traders to “buy low, sell high", making the Bollinger Bands become unuseful. 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).

Introduction


The idea using the Bollinger bands along with the MACD is to avoid being confused when market conditions become unobvious. The BB 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 BB’s 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 the Bollinger Bands & MACD to trade Forex


This system could work well on various charts, from 15-minute to 1-day. Traders will have to observe the performance of the BB indicator and MACD’s 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’s performance. Once the MACD line crosses above the signal line (or the MACD’s histogram turns above the 0.0 level), a bullish signal is confirmed.

Bollinger Bands + MACD

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’s histogram turns below the 0.0 level), traders can go short the currency pair.

Bollinger Bands + MACD

There is a note when trading with this system. Traders have to wait for the candlestick to close before confirming the MACD’s 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


Pros


  • Avoid serious losing streaks
  • Providing more accurate signals
  • Enabling traders to profit from both consolidating and trending market conditions

Cons


  • Requiring traders to constantly observe the charts

Conclusion


Forex markets are getting more and more imponderable, requiring traders to be more and more flexible. Combining the MACD with the BB 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.
See also:
‘Sardar’ forex trading strategy
‘Sardar’ forex trading strategy
08.11.2018
Investment strategies