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
- 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.
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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.