Breakouts are one of the most exciting conditions in the forex market. It is exciting for those who are on the right side of the trade, a missed opportunity for those who were not able to take the trade, but painful for some of those who are on the wrong side of the trade.
One of the keys to trading breakouts successfully is anticipation. So, how do we get to see a breakout coming even before it happens?
The 2 MA MACD Breakout Forex Trading Strategy is a strategy that helps traders identify the direction of a possible breakout and the possible occurrence of a breakout. It uses indicators that would help us objectively identify trade direction and the confirmation of a breakout.
MACD Flat Market Detector
MACD Flat Market Detector is a custom indicator based on the Moving Average Convergence and Divergence (MACD).
It is a momentum oscillator which is computed based on the difference between two moving averages. The difference is then plotted as histogram bars that oscillate around the midpoint zero. Positive bars indicate an uptrend while negative bars indicate a downtrend.
MACD Flat Market Detector is modified to have the histogram bars change colors depending on whether the trend is strengthening or weakening. In an uptrend, dodger blue colored histograms indicate a strengthening trend while red histograms indicate a weakening uptrend. The reverse is true in a downtrend. In a downtrend, red bars indicate a strengthening downtrend and dodger blue bars indicate a weakening downtrend.
The MACD Flat Market Detector also has a dynamic horizontal line which indicates whether the trend is strong or weak. Bars crossing beyond these horizontal markers could indicate a strong trend, however it could also mean that the market could reverse anytime since it is already overextended.
2 MA Crossover BO
2 MA Crossover BO is a trend following indicator which provides trade signals based on short-term trend reversals.
This indicator is based on a very simple concept – moving average crossover. It basically provides trade signals whenever it detects an underlying moving average pair crossing over. The moving average configuration could be adjusted depending on the trader’s preference. Traders could adjust for the length of the moving averages and the type of moving averages used.
The indicator points a trend reversal by placing an arrow on the candle where it detects a trend reversal, pointing the direction of the trend.
This indicator could be used as a trigger signal to confirm the entry of a trade setup.
Trading Strategy
This trading strategy trades breakouts on diagonal supports and resistances that are aligned with a long-term trend.
To identify the direction of the trade, the 200-period Simple Moving Average (SMA) is used as a trade filter. Trade direction should be in the direction of the trend based on the location of price in relation to the 200 SMA. The 200 SMA should also be sloping in the direction of the trend indicating that the market is indeed trending. Visually, price action should also be trending based on the sequence of swing highs and lows.
If the conditions for a trend are confirmed, then the market is observed if it does a gradual retracement. If it does retrace slowly, then we should observe if a diagonal support or resistance is formed.
Trades are taken based on the breakout from the diagonal support or resistance. Entries are then confirmed based on the confluence of the MACD Flat Market Detector and the 2 MA Crossover BO indicator.
On the MACD Flat Market Detector, the trigger will be based on the color change of the bars. The trend on the MACD Flat Market Detector based on whether the bars are positive or negative, should agree with the trend on the 200 SMA.
The 2 MA Crossover BO indicator will simply be an additional confirmation. Trades will be taken as soon as an arrow is printed pointing the direction of the breakout.
Indicators:
- 200 SMA
- MACD_FlatmarketDetector (default setting)
- 2MA Crossover_BO
- MA1: 8
- MA2: 12
Preferred Time Frames: 1-hour and 4-hour charts
Currency Pairs: major and minor pairs
Trading Session: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price should be above the 200 SMA line.
- The 200 SMA line should be sloping up.
- Price should be forming higher highs and lows.
- Price should retrace slowly.
- A diagonal resistance line should be observed on the retracement.
- The MACD Flat Market Detector bars should be positive.
- The MACD Flat Market Detector bars should change to dodger blue.
- The 2 MA Crossover BO indicator should print an arrow pointing up.
- Enter a buy order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the MACD Flat Market Detector bars change to red.
Sell Trade Setup
Entry
- Price should be below the 200 SMA line.
- The 200 SMA line should be sloping down.
- Price should be forming lower highs and lows.
- Price should retrace slowly.
- A diagonal support line should be observed on the retracement.
- The MACD Flat Market Detector bars should be negative.
- The MACD Flat Market Detector bars should change to red.
- The 2 MA Crossover BO indicator should print an arrow pointing down.
- Enter a sell order on the confirmation of the conditions above.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the MACD Flat Market Detector bars change to dodger blue.
Conclusion
This breakout strategy is an excellent type of breakout strategy. In the right hands, this strategy could be very profitable.
Trading on breakouts coming from retracements is a widely used strategy. Many traders do this with a variety of trade setups. Some traders trade this as a part of a pennant or flag setup, other traders trade it as a simple breakout of a diagonal support or resistance. Other traders trade it on a naked chart, while others trade based on a technical indicator confirmation.
This strategy uses technical indicators to confirm the breakout. In some instances, there will be delayed entries, but this allows us to be more accurate in our trade setups as the entry is based on an objective trigger condition.
If traded with a good trade management technique, this strategy should produce good results.
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