MACD 4 Hour Trading Strategy

Author

Tobias Robinson

Tobias is a UK director and partner at Investing.co.uk. He provides commentary on the financial markets in the UK and supports the testing team with first-hand observations from over two decades of active trading.

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Fact Checker

William Berg

William is an experienced investment writer with a history in forex trading software localization and IPO consultancy. He contributes as an author and fact-checker for established financial websites.

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Most forex strategies will work well when kept as simple as possible, which is the aim of this MACD 4 Hour Trading Strategy. Nothing confuses new traders more than having charts that are loaded with countless indicators. When you have indicators flying everywhere, it is difficult to interpret the signals generated and this will lead to mistakes in entry signals.

The forex trading strategy that is described below is a simple forex trading strategy that involves the use of the Moving Average Convergence Divergence (MACD) indicator only. The chart used for the execution of this strategy is the 4 hour chart, which is the midpoint chart between the hourly chart and the daily chart. This makes this strategy good for traders who have a medium term outlook on the currency asset in question.

Entry Rules

The MACD indicator is set to 5,13,1 and attached to the chart. Here are the entry rules.

This strategy depends on watching the price action candles at 0800hrs, 1200hrs, 1600hrs and 2000hrs. Study the price action chart 10 minutes before these times, and watch the previous 3 previous MACD signals at these times.

Chart showing entry rules for long and short positions 

Long Entry

The entry candle for a long order is the candle at 0800hrs. Take a look at the MACD value on the previous 4hr candle located at the 0400hrs point, and then go further backwards to look at the previous candle located at 2000hrs. If there is difference of +50 from the MACD value on the 2000hrs (previous day) candle and the MACD value at 0400hrs (the candle before the signal candle), then go long at the open of the 0800hrs candle.

1. At point A where we have the 2000hrs candle, the MACD value is 241.
2. At point B where we have the 0400hrs candle, the MACD value is 476.

Since the value of MACD at the 2000hrs candle is lesser than the MACD value at the 0400 hrs candle, the difference between the two values is + 235 (which is much higher than +50) and the bias for the trade is bullish. As such, the trader should immediately go long at the open of the 0800 hrs candle. We can see that the price action climbed into profits thereafter.

The success of this trade depends almost wholly on the trader’s ability to detect the correct candles as well as check the correct values of the MACD indicator at these points.

The short entry candle above is the 0800hrs candle. Each candle on 4 hour chart lasts 4 hours. Moving the cursor of the mouse to the top of a bullish candle (the transparent ones) on MT4 will reveal the time the candle opened. In addition, moving the mouse cursor to the bottom of a bearish candle (the opaque ones) will show the time the candle opened. Similarly, moving the cursor to the MACD bars will show the MACD value.

Following these rules will avoid the problem of applying trade signals to wrong candles.

Short Entry

For a short entry, we would be looking to see if the difference in the value of the MACD between the previous day’s 2000hrs candle and the previous candle before the entry candle (0400hrs candles) is -50. Repeat the MACD evaluation as described above for the long entry, but this time, check to see if the difference between the 2000hrs candle and the 0400hrs candle is -50. If this is the case, then the trader should go short at the 0800hrs candle.

We need to understand that the values of +50 or -50 are the minimum values required for generating the signal. The more positive the difference, the stronger the long entry signal. Similarly, the more negative the MACD difference, the stronger the sell signal.

1. At point A where we have the 2000hrs candle, the MACD value is 1371.
2. At point B where we have the 0400hrs candle, the MACD value is 351.

Since the MACD value at the 2000hrs candle is greater than the MACD value at 0400 hrs, the difference between the two values ( – 1020 which is much higher than -50) confers a bearish bias for the currency asset. As such, the trader should immediately go short on the open of the 0800 hrs candle. We can see that the market dropped and would have put the trader into profit if he went short.

Exit Rules

Position 1: Set the Take Profit level at 30pips and take the Stop Loss at 30pips.
Position 2: Set Take Profit at 45 pips and take the Stop Loss at 30 pips. Once you are 30 pips in profit, close half the position and move the stop loss level to break even point (i.e. to entry point).

The trader can also use levels of support and resistance as a benchmark for trade exits.