How to enter to a trade with the use of MACD indicator.
Traders who use the MACD indicator often are critical of the
fact that it will signal an entry after the initial move has begun and
therefore leave pips behind. As such, many traders wanting to enter a trade
sooner dismiss it as a “lagging” indicator.
In the case of the MACD indicator, the most widely used
entry signal is when the MACD line crosses over the Signal Line in the
direction of the Daily trend. Since these two lines are simply two moving
averages (we are talking about moving averages on our next post), by their very
nature the crossover will not occur until the move itself is under way. And,
since that crossover is the entry signal, this will get you into the trade after
the initial move has begun. Some traders prefer this method of entry as it
offers more confirmation that the move is more likely to continue in that
direction.
For more aggressive traders who are not interested in the
additional confirmation and are simply looking for an early entry, they may
prefer a less widely used entry signal based on the histogram bars.
As seen on the 1 hour chart of the EURUSD below, as soon as
price action begins to move to the downside, the green histogram bars will
begin to shorten. As soon as a bar does not close above the previous bar, that
means that upside movement by price has subsided for that moment in time. An
aggressive trader can use that as a signal to short the pair at that point.
Traders who are a little less aggressive may prefer to wait
until a few histogram bars (perhaps 3-5) in a row close continually lower…or
continually higher in an uptrend. This will provide greater confirmation than
just one histogram bar but generally will be a quicker entry than waiting for the
MACD Line to crossover the Signal Line. As can be seen on the chart below,
although the bearish move has begun, the crossover entry signal has not yet
taken place.
Note how a trader entering based on the histogram bars would
have entered the trade ahead of a trader who entered based on a MACD/Signal
Line crossover.
Each of the above entries based on MACD is a valid entry. As
usual, it is up to each individual trader to decide which one is right for
them.
Keep in mind however entering a trade sooner means entering with
less confirmation and that is not always a good thing.
