Using Bollinger Bands and the MACD Strategy

Bollinger Bands (BB) provide useful signals during technical trades. If used with the Moving Average Convergence Divergence (MACD) indicator, traders get invaluable insight into the momentum and volatility in the forex market.

The Bollinger Band and MACD Combo

In this combination, traders use both Bollinger Bands and MACD for supporting trade set ups. Bollinger Bands allow a trader to view volatility’s cyclic nature. The MACD is a momentum indicator that follows trends. The MACD is made up of two EMAs (Exponential moving averages), which consist of:

  • 12 for fast moving averages
  • 26 for slow moving averages
  • 9 for the signal line

The Bollinger Bands settings are:

  • 12 for the moving average
  • 2 standard deviations for the bands

Using the two indicators assists traders when they venture into trades with higher probability. This allows them to tell the strength and direction of a trend, plus its volatility. Because of this, traders can use the MACD for assessing whether a trend’s momentum is improving or slowing, and setting up for a potential breakout, while the Bollinger Bands are useful as entry triggers and confirming a trade.

How to Use BB and MACD to Trade Forex

You can trade with BB and MACD in various ways, but two of the most popular ways with both indicators involves breakouts and trend trades.

·         BB breakout Strategy Using BB and MACD

Traders who want to trade BB breakouts can consider:

  • Identifying a trending market with the MACD
  • Looking for divergence in the MACD histograms, which signals a possible breakout
  • Looking for an entry on a 20 moving average break or trendline.
  • Looking for a breakout confirmation through a BB breach, increased volatility of the BB and an increased momentum

·         Trend Trade with BB and MACD

The BB and MACD combo are also useful in trending markets by this process:

  1. Identifying the trend via MACD
  2. Using bounce off of 20 MA as possible entry points in tandem with the trend
  3. Looking for MACD for confirming continuing momentum
  4. Using the lower band as a stop loss in an uptrend and using the higher band as stop loss in a downtrend.

Bollinger Bands and MACD Buying and Selling Rules

Buy Signals

  • The price should be touching down to the lower Bollinger Band
  • When the prices bounce off the lower BB, the MACD histogram should go over the 0-line
  • Try going long on the candle and make stops at the closes low
  • The signal is more powerful when the Bollinger Band is sloping upwards
  • When the Risk/Reward ratio is 1:2, exit the partial profits. When you make the partial exit, move for an even break and trail stops under the lower Bollinger Band

Sell Signals

  • The price must be touching the upper Bollinger Band
  • When the prices ricochet off the upper Bollinger Band, you should wait until the MACD histogram to go over the 0-line.
  • Go slow on the candles and close with stops near the closest high
  • Partially exit at the 1:2 reward ratio and shift the stops so you can break even, while trailing the position remainder to the outer Bollinger Band.

Advantages and Disadvantages of the BB and MACD System

Advantages

  • Both Bollinger Bands and the MACD can be applied to various assets, across all time frames
  • Bollinger Bands by default provide stop-loss measures that coincide with the upper band for short trades and the lower band for long trades.
  • Traders can easily determine the market volatility and trend

Disadvantages

Combining the BB and MACD is not advisable for novices in the trade. The newbies to Forex trading need a better knowledge of the Bollinger Bands and the MACD. Bollinger Bands work better in ranging markets, while the MACD is a momentum indicator that follows trends. If wrongly used, the trader will get mixed signals and the strategy will not work in their favor.

Conclusion

When you use the Bollinger Band and MACD strategy, you create a powerful, yet simple short term trading plan. As a trader, using this set up uses the trend that is determined by the Bollinger Band slope, while also using how the Bollinger Band expands and contracts. Using these strategies allows traders to enter before a breakout, and if judged correctly, can lead to profits within a short period.

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