Reliable and Effective FX Trading Strategy Based on MACD, RSI and SMA.

Ted Capwell Updated:

Experienced traders know that different market conditions require different trading approaches. Sometimes it happens that the technical analysis does not work, especially when some crucial or unexpected event shakes out the fundamental part of the analysis and traders’ sentiment is getting driven by psychological factors like fear or greed. But those examples are quite rare and exclusive hence focusing on most often cases would be correct if we talked about seeking a multi-purpose FX trading strategy applicable for many different market situations. It’s also understood that it has to be based on popular and effective technical indicators which deserved to be widely used amid their performance in different conditions. The number of fake signals coming from those indicators has to be extremely low in order to maintain the highest level of efficiency, therefore, the frequency of entries will be quite low as well. If we took the mixture of requirements described above, then one of the best choices would be the FX trading strategy based on MACD, RSI and SMA.

Dozens of articles were written about those three indicators, there is no reason to focus on them in details. We would just shortly describe their main features which have been discovered during the practical usage in real-time trading. The Moving Average of Convergence and Divergence is a rather complicated technical indicator. It’s rather slow in terms of reaction for every single fluctuation of the price but that’s the biggest advantage. MACD is a trend indicator meaning that it does not show exact entry/exit levels in sideways ranges. At the same time, it shows the momentum, direction of a trend and, which is probably the main advantage, it perfectly shows divergences when the current trend is getting exhausted and chances for a reversal are getting higher. We recommend using default settings for MACD indicator as they proved their efficiency for many assets and timeframes.

The Relative Strength Index is a fast oscillator, the most popular among other similar indicators. It points to overbought/oversold levels of a price, confirms or denies divergence from the MACD slow indicator and RSI signals when the current market conditions are changed in the scope of bullish or bearish sentiment. The RSI’s level of 50% is a kind of litmus test for the current trend, showing whether the tendency is going to continue or would the price action change to the completely opposite direction. The default period of RSI oscillator is 14 bars (days or hours, depending on the timeframe) but we recommend changing it to 13 bars for slow-moving currency pairs and assets (like EUR/USD or GOLD), and to 21 bars for volatile financial instruments (GBP/JPY or USD/ZAR).

The Simple Moving Average is an additional technical tool in this FX trading strategy but it’s extremely helpful in determining exact entry/exit points for trading positions. Most of the technical analysts use round-figure periods for SMA (20-, 50-, 100-bars) but we prefer using numbers from the Fibonacci row (21-, 34-, 89-bars). Anyway, the combination of settings for any trading system depends on several factors like the asset to trade on, money management rules and the general trading strategy which is always an individual choice. FinmaxFX offers the widest range of technical indicators in its advanced charting tool, in-depth technical analysis outlooks and online support. The best approach for traders would be to develop a personal trading strategy based on individual financial goals and targets, the volume of trading account and risk-management rules. FinmaxFX clients get a personal account manager to consult and chose the optimal combination of those factors. The broker’s support team consists of experienced traders, therefore, FinmaxFX clients are able to get the deepest consulting possible when it comes to trading in the Forex market.

Once the combination of technical indicators is chosen, it’s time to move forward to assets and timeframes. It’s a well-known fact that the technical analysis works best for financial instruments with higher trading volume rather than for low-volume and volatile assets. The best choice would be EUR/USD for this trading strategy as it’s the most popular currency pair, it has the highest trading volume (60% of the US dollar’s volume-weighted basket is euro) and it’s technically correct (does not have lots of whipsaws, shadows and fake breakouts). Several other currency pairs can also be chosen without losing the efficiency and reliability of the trading system based on MACD, RSI and SMA. For example, USD/CHF and GBP/USD currency pairs are also applicable among other majors, while gold and oil could be considered among commodities. Timeframes range is quite wide: from 1-hour intraday chart to 1-week long-term period. The only thing we would not recommend is trading on shorter timeframes like 5- or 15-minutes as those charts are full of fake trading signals and the strategy’s efficiency would be lowered because of that. Anyway, it’s always better to test the system before using it in the real trading account. FinmaxFX consultants will help traders choosing the hottest and most profitable asset in the Forex market. Let’s move to practical examples.

The 4-hourly chart below shows an example of how this trading system works. There is an obvious and continuous downtrend on EUR/USD which enters into a phase of uncertainty (green line on below the price). Slow MACD starts pointing to a bullish divergence with its lines showing higher lows, while the price keeps charting lower lows. Moreover, the MACD histogram remains in the positive territory (green bars above the 0 level). That’s the first signal to get ready for a reversal. Next, fast RSI has to be monitored. It comes out of the oversold level and charts the series of higher lows, confirming the bullish divergence seen on MACD earlier. Once we get long whipsaw on the 4-hourly candlestick, we open a long position. The profit has to be taken on the test of SMA89, as we can see from the price action that the uptrend is getting exhausted in that range, which puts our current profit at risk. Therefore, it’s better for grabbing your money and run. The overall profit of 100 pips (four-digit quotes) is rather good for such a slow-moving currency pair as EUR/USD, especially in the light of how fast the price bounced off the oversold levels and went back to long-term moving average.


стратегия на основе MACD, RSI и SMA

Another example is based on by-trend confirmation. We do not look for a trend reversal here. Let’s imagine we already took some partial profit from the upside movement, or even we missed the reversal pattern for some reasons. We’re looking for good entry level to join the current trend and we see that the price has breached SMA89 clearly, going well above the average price range. The MACD indicator is rather bullish at that moment, both lines are directed North and the histogram is in the positive territory, pointing to a bullish continuation. The RSI oscillator is far from overbought levels, having plenty of room to go up. What happens with EUR/USD is that the pair bounces back to SMA89 support curve, which used to work as the resistance before. The crucial moment is that the RSI stays above the 50% level on that candlestick’s close and the price failed to break through the SMA89 support. We go long on the next candlestick open and we take profit on the second test of the overbought level by RSI. Another 80 pips on EUR/USD with by-trend bounce application of the same three technical indicators working together.

Надежная и эффективная валютная торговая стратегия

As a conclusion, it’s worth mentioning that the combination of these three technical indicators is widely used in the technical analysis for the FX market. It has lots of practical applications in different market conditions, it works effectively to confirm or deny the recent trend and it shows entry/exit levels for profitable trading both intraday and long-term. At the same time, reading books and making theoretical conclusions is surely useful but that process does not pay bills nor brings profits, unfortunately. The best option to test any trading strategy is to open a real trading account, even the smallest one, and start making real steps in the fascinating journey of the financial markets. FinmaxFX is ready to help, all you need is just sing up on the website.


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