Forex Trading Strategy Combining the Moving Average Convergence Divergence and the Average Directional Index

Combining the Moving Average Convergence Divergence and the Average Directional Index

You will learn about the following concepts

  • Indicators used with this strategy
  • Signals to be looking for
  • Entry point
  • Stop-loss
  • Profit target

For this strategy we will be examining the daily chart of GBP/USD. The indicators we will be using are MACD (with settings Short term – 3, Long-term – 10, MACD SMA – 18) and ADX with its period set to 18, +DI (green line on the chart below) and -DI (red line on the chart below).

A trader needs to examine the MACD. If the MACD turns positive, while the +DI moves above the -DI, this is a setup for a long entry. In case, however, the +DI is below the -DI and the MACD provides a signal to go long, the trader needs to abstain from action. He/she will instead wait for the +DI to move back above the -DI in order to enter into a long position.

If the MACD turns negative, while the -DI moves above the +DI, this is a setup for a short entry. In case, however, the -DI is below the +DI and the MACD provides a signal to go short, the trader needs to abstain from action. He/she will instead wait for the -DI to move back above the +DI in order to enter into a short position.

The trader will use a trailing stop, so that he/she is able to preserve gains.

Below we visualize an example of a long trade, a short trade and a situation, when the trader should not enter the market.

chart 5.0