ADDING THE MACD

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Adding The MACD This is information that will only be good to you if you already have an understanding of the Forex Strategy Master system. If you do not know the components and rules of the FSM system, please learn the method before you continue with this report. Filtering the trades we take with the MACD As you will probably agree, the FSM methodology is a really nice and straight forward way to trade. One problem has emerged, though. The farther the price moves in one direction without a significant pullback, the less likely the market is going to continue to move in that direction. What this means is that as the market has moved a long ways, whatever trade signals we get become less and less likely to pan out. The trick then becomes do somehow develop a method, or a way to make this determination... when has the market over-extended itself to the point that trades are no longer safe to take. We always take on some risk with each trade we take, but if we can find a way to simply avoid high risk environments, we can reduce the number of failed trades we take. This adds to the bottom line, and that is what we all want as traders. This is where the MACD comes into the picture. The MACD has a way to see if the market momentum has begun to slow down, and slow down enough to make trend following trades dangerous. 4

Below you will see an image of the MACD: What we will be focusing on will be the red and green histograms. When the histograms are red, there will be momentum to the downside (or lack of momentum to the upside), this means we have the go ahead to look for sell trades if we are trending down. When the histograms are green, we will know that the momentum is up (or lack of downward momentum) and we can look to buy if the market is trending up. NOTE: This is important! We don't trade the MACD on its own, it will help support all the other FSM indicators the way we have learned to trade them. The Moving Averages must be in order and the GHL/QTI must also be in agreement. 5

When we add the MACD to the system, this is what it looks like: Nothing else changes, the moving averages are all intact, the GHL and the QTI are still present. What we are using the MACD for is to help us determine if the momentum is still in the direction of the prevailing trend. The MACD is used on the setup timeframe, this is where we need to know if the market can keep going in the direction of the trend. **The MACD can also be used on the trade timeframe, but can also be ignored. The times you might ignore the MACD on the trade timeframe is on a timeframe that is small like the 1 minute or the 5 minute. On these small timeframes, the market can get a little choppier and move really quickly, and on these faster timeframes, the MACD can become delayed as it tries to keep up. 6

MACD Settings We won't be using the default settings of the MACD. Instead, we're going to be using settings that are faster, and serve another purpose on top of Momentum. Here are the settings: Fast MA: 13 Slow MA: 21 Signal Line: 5 This creates a faster MACD that still shows momentum and divergence, but also can give trade signals as the histogram changes color. Generally, a MACD is too slow to give you histogram signals and still be effective, but through a lot of testing and experimenting, the 13,21,5 settings have proven themselves to fit all the requirements we want from it. You can download my personal MACD by clicking here. This is the basic 2 line MACD with the addition of a histogram multiplier... this will allow you to make the histogram taller so you can see it when it gets narrow. Also, you can choose to eliminate the Blue MACD Line and the signal line to only leave the Histogram by setting ShowLines to false. 7

In the below chart example, you can see that the market is clearly down. The 15 EMA is under the 45 EMA. The GHL and the QTI are red so looking for short Quick trades or short Power trades would make sense. The MACD Histogram turns green suggesting the momentum is failing and there is no pressure for the market to continue to fall. You can see in the image above, taking short trades in the area where the MACD histograms were green would have all been losers. Remember, this filter is on the SETUP timeframe (the higher timeframe), this is the timeframe you are looking for Power Trader or Quick trades to setup... not actually take a trade from. 8

In the chart below, you will see a market trending upwards. The 15 is over the 45 and the GHL/QTI are green, so looking for long trades is what we would be doing. The red MACD histogram voided any opportunity we would have been looking for to trade long. If the MACD histogram is doing the opposite of the trend (moving averages and GHL/QTI) then we just don't look for a setup at all. 9

Using the MACD and looking for a trade It might be a little unclear as to how to you actually incorporate the MACD with looking for a trade. I will show you how this works. **Remember, you need to have the basics of the FSM system understood, otherwise the following won't make a lot of sense to you. When looking for a long trade: 1. We want the indicators to be in order: A) All the moving averages are in a technical trend - 3 EMA over top of the 5 EMA - 5 EMA over top of the 15 EMA - 15 EMA over top of the 45 EMA B) The GHL and the QTI are green. C) The MACD Histogram is green. 2. We wait for a pullback of the price to the 3 EMA for a Quick Trade, or the 5 EMA for a Power Trade. **During this time, the MACD Histogram and the GHL/QTI Histograms must remain green. 3. We switch to the lower timeframe and wait for a signal to take a long trade. All these criteria MUST be met: A) 15 EMA remains above the 45 EMA B) GHL/QTI turns green. (They may have turned red during the pullback, that's ok) C) A candle closes above all the moving averages. **We don't need the MACD to turn green on the trade timeframe, especially on the 5 minute. If at any time the MACD Histogram turns red, the trade setup process stops and we wait for the MACD to turn back to green. 10

Below is an example of a section in the market where everything looks nice for a trade, but we don't even look for a setup. Because the MACD Histogram is red, the potential for the market to drop is too high, so we skip this section. The red MACD section was skipped, and on the next candle, we have all the criteria met to start looking for a long setup. 1. Technical trend (all moving average in order) 2. GHL/QTI is green 3. MACD Histogram is green. 3 candles later, we get a very clear Power Trade setup. You can see that if this was trade you would have taken, it would have been a very nice move. **The trade would have been taken on the lower timeframe, in this example, it would have been the 15 minute as the setup timeframe, or the higher timeframe is the 1 hour. The market will move nicely when the MACD Histogram is in the same direction of the moving average trend. 11

If we shift the chart from above over a few candles, we can see a section where the market looked to give us another opportunity to look for long trades. All the general FSM criteria is met: 1. Moving averages are in a technical trend 2. The GHL/QTI are green. However, the MACD Histogram remained red and there was no trade taken... we weren't even looking for a setup at this point because the MACD was not in agreement with the rest of the FSM system. The market got choppy and the MACD kept us out of potential danger. **NOTE I have to say that there will be times when the MACD turning color will actually prevent you from taking a winning trade. From my experience, the filter effect is well worth the occasional non trade. 12

MACD for Divergence The MACD has a much faster setting, but even with the quicker response time, it can still be used as a divergence indicator. **In the manual, I won't take too much time teaching what divergence is, but from the examples, you will see it very quickly if you don't already know about it. Below you can see an example of Regular Bullish Divergence. The price makes a lower low while the MACD Histogram makes a higher low. This suggests that the downward momentum is failing and the market will want to either take a break and move sideways, or actually move in the opposite direction. The Solid lines are the lines that depict the divergence. The white dotted line is simple a trendline. I try to use a trendline in my divergence trading as much as possible. A close past a trendline immediately after a divergent setup will be a nice trade opportunity. The divergence can be found on the MACD Histogram OR the blue MACD line, it doesn't matter which. 13

Previous to the Bullish divergence was a nice looking Regular Bearish Divergence. Divergence is nice as a trade setup on its own, although we don't cover it extensively in the FSM system. I just want to show you that it does still do what it's know for, When you see divergence on the MACD, a great way to make use of this information is to make a point of it and be aware that the market may not move with the trend. If the trend is up and there is regular bearish divergence present, even though the moving averages and the GHL/QTI are green, we can assume the market will want to drop instead of rise. It's not something you need to trade, but being aware of it will help you avoid potentially troublesome spots in the market. 14

The MACD will add an extra dimension to the basic FSM system. The additional filtering mechanism will save the day more often than you can imagine. It's a nice extra that doesn't compete with the system, but adds an extra dimension to it. Enjoy the MACD, have fun with it. 15