MACD and Bollinger Bands Strategy – Reliable Buy/Sell Forex Trading Strategy 

 December 20, 2015

By  Advanced Strategies

Today, we look into the MACD and Bollinger Bands Strategy and how to get it to work for us by providing us reliable buy/sell signals. The Bollinger Bands have been around for quite some time and they have been invented by John Bollinger, and essentially they are used to identify a price volatility and they do that by using a standard deviation around a simple moving average. Typically Bollinger Bands use a 20 period MA with a 2 standard deviation on both sides and they are used to project resistance above and support below.

In this article, you’re going to learn how to master the use of Bollinger Bands to identify high probability trade entry and potential exits for trading the FX market. To use the techniques outlined in this article, it will definitely enable you to find some very high probability trade setups. Bollinger Bands I think are one of the most misunderstood of all technical indicators. People often think that it gives an absolute kind of buy and sell signals which are further from the truth as they simply give you more information of rather the price are high or low on a relative basis. By definition price is high or overbought at the upper band and prices are low or oversold at the lower band.

We can use Bollinger Bands to build rigorous trading approaches in combination with other tools and price action. In this regard going forward, you are going to learn how to trade using the Bollinger Bands in combination with the MACD indicator.

MACD and Bollinger Bands Strategy Settings

This basic premise behind this strategy is to help you capture that high momentum and explosive moves that we often see in the market. This is a scalping technique that uses both the Bollinger Bands indicator to identify price volatility and the MACD indicator to gauge the trend momentum. We’re going to use the standard default settings on both of these indicators:

Bollinger Bands settings:

  1. Period = 20 Day Exponential Moving Averages;
  2. Deviation = 2 Standard Deviation;

MACD settings:

  1. Slow EMA = 26;
  2. Fast EMA = 12;
  3. MACD Line = 9;

MACD and Bollinger Bands Strategy

MACD and Bollinger Bands Strategy Chart Setup

This strategy basically works on any currency pair and on the 15-minute chart. The success behind this strategy requires a lot of patience until all the conditions are aligned in favor of the trader. We’re going to use the Bollinger Bands for a breakout and essentially we’re looking for these bands to narrow as this is indicative of a ranging market. Basically, we’re going to try to catch the breakout from this small range zone as small range candles are followed by big range candles.

MACD and Bollinger Bands Strategy – Entry Rules

MACD and Bollinger Bands Strategy  – BUY/SELL signals:

  • Wait for the upper and lower Bollinger Bands to narrow;
  • Buy at the moment we penetrate the upper band with the MACD histogram above the zero line, but with the MACD histogram below both EMAs.
  • Sell at the moment we penetrate the lower band with the MACD histogram below the zero line, but with the MACD histogram above both EMAs.
  • Stop Loss in both cases 5 pips below/above the middle Bollinger Band.
  • Take Profit first level of resistance.

MACD and Bollinger Bands Strategy - Buy Setup
MACD and Bollinger Bands Strategy – Buy Setup

In our first example, we can see that even though the upper band was penetrated the MACD only confirmed the signal later on which give us a much better entry price and the timing was also perfect as soon as we got in the trade the market accelerated to the upside.

MACD and Bollinger Bands Strategy - Sell Setup
MACD and Bollinger Bands Strategy – Sell Setup

MACD and Bollinger Bands Strategy – Use it to prevent False Breakout

The main benefit of using this strategy is that the signal is not generated as soon as we penetrate the Bollinger bands, this way we’re eliminating a lot of the potential false breakout that the market is prone to do. But instead, we can see that the signal is always generated at a better price and the timing is a lot better with very little drawdown.

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