98# MACD Histogram with full Stochastic
Swing 4-candles Forex Strategy
Submit by JamesUK 10/06/2013
Rules for MACD Histogram with full Stochastic Forex Strategy
I have made this guide as easy to follow as possible, there is no fluff or filler I will just get straight to the point. If you follow this to the letter I
can guaranteed you will see BIG profitable trades.
Any and all – I use the following and make sure I include all the major pairs-
AUD/CAD, AUD/JPY, AUD/USD, CAD/CHF, CAD/JPY, CHF/JPY, EUR/AUD, EUR/CAD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/NZD,
EUR/USD, GBP/AUD, GBP/CAD, GBP/CHF, GBP/JPY, GBP/NZD, GBP/USD, NZD/CAD, NZD/JPY, USD/CAD, USD/CHF, USD/JPY
The reason I use so many is that this is a swing 4-hour candle forex strategy, although you can use it for 1 day as well. Each 4 hours (or 1 day) I look at all
the above pairs for a set-up. It only takes a few seconds to look at each one to see if there is a valid set-up. I explain more below.
Chart set-up -
I use MT4 with the following settings:
4hr candlestick (I use white for bull candle and black for bear both with white border, with a black background, but up to you)
SMA10 in blue
Full stochastic with settings 10,6,3
MACD histogram with standard settings of 12,26,9 (I don’t use the two crossing lines, so if you have them, make them, black so they don’t
appear against a black background)
Over the page is what the chart should look like in Pic1. You can see I’ve added a couple of lines on the stochastic at 30 and 70 as well as the
standard 20 and 80. It’s only a visual thing for me and not important to this Forex Strategy although I do use them on another Forex Strategy.
In the pictures MACD Histogram with full Stochastic forex system in action.
Set-Ups and Use
As I said earlier, I check the charts every 4 hours at 8:00, 12:00, 16:00 and 20:00. If I’m wide awake at midnight, I’ll check them then as well,
but you don’t have to – got to sleep sometime! It might sound a lot, but really it isn’t. You take a just a few seconds to scan each one. Here is
what you’re looking for, with examples.
Look at Pic2 over the page for along set-up. You will see candles labelled 1, 2, 3 and 4 with ticks and crosses, a tick being valid and a cross
being not valid.
You’re waiting for the following:
1. Candle to close above SMA10
2. Stochastics crossed to travel upwards and be rising, preferably above 20 but doesn’t have to be
3. MACD histogram to cross from below to above the zero line
At candle 1 - MACD histogram gets a cross because it’s below the zero line. Stochastics haven’t yet crossed. The candle hasn’t finished clearly
At candle 2 - MACD histogram gets a cross because it’s below the zero line. Stochastics have crossed up so they get a tick. Candle gets a tick
because it’s closed above the SMA10. But we have to wait for all 3 conditions to be good.
At candle 3 – Now all 3 conditions are met and they get 3 ticks.
Wait until candle 3 closes – very important, because it could go back down to finish below the SMA10. So wait until it’s completed.
Entry at open of candle 4 long.
If you zoom in a bit you can see I’ve put the entry price at the side, reading 1.47210.
Stop Losses and Take Profits
Now, where to put Stop Loss (SL) and Take Profit (TP)?
This depends on your money management and risk management. An aggressive entry would see the SL just below candle 3, at the low of the
candle less 3 pips. A less aggressive entry would put the SL at the low of candle 2 less 3 pips. Or you can choose the low of candle 1 less 3 pips,
or even 3 pips below the last swing low at 2 candles before candle 1.
In this instance, choosing the low of candle 3, less 3 pips gives a SL at 1.4704 which is a 17 pips SL. Candle 2 SL would be at 1.4674 which is a
47 pip SL etc. The swing low SL would be some 90 pips away. It’s up to you. For this one I’d probably choose the SL at candle 2 and then buy lots accordingly.
Buying 0.1 lot would mean $1 per pip, so I could lose $47 on this trade. If your account has $4700, then that’s only 1% of the account you’re
risking. So I would probably risk 2% or 3%. If I buy 0.3 lots which is $3 per pip, then I risk $141 which is 3% of the $4700 account.
The best suggestion I can say is to build your own calculator in excel where you enter your trading account balance, stop size, risk in percentage,
then it can calculate how many lots to buy. Easy to do, and I can send you one if you want.
Now, what about TP? I try and work on at least a risk/reward ratio of 1:2 or even better 1:3 if I think it will go that high.
Let’s look at 1:2 first. We risk 47 pips, therefore I want to gain 94 pips. If entry was at 1.4721, then I want a TP at 1.4815 giving me the 94 pips.
Now 1:3. We risk 47 pips, therefore I want 3 times that as a profit which is 141 pips, which would be at the price of 1.4862.
Take a look at Pic3 over the page for a minute.
Pic3 shows the entry, SL as the pink line below candle 2 and the two potential TP levels shown as a white horizontal and a blue one. I’ve also
numbered further candles for reference.
How I generally decide which one to take is to look at previous price action swing high and lows. In this case, highs because we’ve gone long.
Looking at the previous price action you can see that the price didn’t really go too much higher than our first target at the 1:2 risk reward ratio of
1.4815. So in this case, I would set the TP at that level. You can see candle 6 hits that level.
Sure, candle 8 also hits our further 1:3 target, but I’d be worried if I saw candle 7 appear.
So in summary, where I put the TP depends on the previous price action.
The entries that look to me will normally give me the 1:2 risk reward that I want as a minimum. So it’s not only meeting the 3 conditions of the
candle closing above the SMA10, the stochastics rising and MACD histogram above zero, I will also look whether there is enough room to give
me the 1:2 reward. If I think there is not enough room to get to the 1:2 target, then I don’t take the trade and go looking for another. With 20+
pairs to look at, there is something normally coming along very soon.
Another thing to keep in mind. Let’s say my TP is 94 pips as in the above example and I go to look at the trade some 4 hours or 8 hours later.
Let’s say at that point that I have a current 70 pip profit. What to do? Do I leave it alone and risk it going all the way back down to my SL? No
way !!!!! At this point I will one of 2 things.
Either close the whole position and take the 70 pips profit, or close half the position, move the Stop Loss to entry + 10 pips and let it run. Either
way I can’t lose. To help me decide, I will change the chart to look at a 1 hour chart and on this shorter timeframe I will look for pin bars or
some candle formation that tells me it may be going against me. If so, then I get out.
There is an old saying in fx – never let a winning position become a losing one. There’s no way I’ll risk losing the 70 pips I just made, and I
would probably close out the whole position. Don’t forget, you risked say 3% with 47 pips, and you got 70 pips, which is 4.46% growth on your
account in 1 trade. (That comes from 47 pips = 3%, therefore 1% - 47/3 = 15.66 pips per 1%. 70 pips / 15.66 = 4.46%).
If you left it to go to the full 1:2 risk reward target, then you gained 6% in one trade. Can’t make that in a year with a bank deposit! And there are
many such set ups during the week.
Exactly the same principles but in reverse. Take a look at Pic4.Pic4 – Short entry
Pic4 shows the short setup as the reverse of the long. This time, I’ve added a confirmation which is a trendline shown in orange. The trend line is
formed by candle 1 and a previous candle that you can see where the trendline comes from.
Candle 2 breaks this line downwards and finishes below it. But candle 2 isn’t a setup yet. Price is still closed above SMA10, the stochastics you
could argue either way, and MACD isn’t below zero yet.
Candle 3 satisfies all the conditions with price closing below SMA10, stochastics crossed and definitely going down, and MACD below zero.
Entry short is at the open of candle 4 at 1.41983.
Stop loss can be placed at the top of candle 2 + 3 pips at 1.4247, giving about 49 pip SL.
Again using 1:2 roughly we want 100 pips profit at 1.40983 (just easier than 98 pips!).
Using 1:3 then we want 150 or a TP at 1.40483.
Pic5 – Short entry with SL & TP
Pic5 shows the entry, SL and two TP points.
Looking at previous price action there seems to be plenty of room to get to the 1:2 level TP and also room for the 1:3. Having said that, the 1:3
level will be getting close to the previous resistance level, so again, I favour 1:2 level, which it hits without a problem.
There are many ways to exit this including moving the SL down to behind the previous bar if you wanted to wait and see if it went to the 1:3 TP
level. Or again, take half profits by selling half the position at the first TP level, moving SL to entry + 10 pips and letting it run.
Share your opinion, can help everyone to understand the forex strategy.