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Many traders find themselves entering trades ahead of time because they were anxious and they anticipated that their entry signal MIGHT take place. They wanted to enter early in the hopes of capturing more pips. For higher probability trading, wait until your entry signal DOES take place.
This lack of “patience and discipline” can take several forms: for example, not waiting for a break of support or resistance or, in the case of using an indicator, not waiting for the actual entry signal to occur. For the purposes of this article, let’s focus on the MACD indicator.
First and foremost we only want to take trades in the direction of the trend on the Daily chart...that is the first step.
Don't let the MACD (or any other indicator for that matter) decide the direction of the trend for you. The indicator does not know the direction of the trend! The trader makes the determination of which direction to be trading the pair based on the direction of the trend on the Daily chart. Once that is done, then we consult the MACD to fine tune our entry in the direction of the Daily trend.
Let’s take a look at the 4 Hour chart of the GBPJPY pair below…
Having already checked the Daily chart on this pair, we know it is in a downtrend as price action is below the 200 SMA, it is making lower highs and lower lows and the GBP is weaker than the JPY at the time of the analysis.
Based on that, we know we want to short the pair and for our entry signal we will use a MACD crossover on the 4 Hour chart.
In the black circle on the chart above, we can see that the MACD (red) line is poised to crossover the Signal (blue) line to the downside. Notice that I said “poised”. Poised does not mean that it will crossover. It means that it is “positioned” to crossover and that it “may” crossover. We want to wait for the MACD line to fully crossover the Signal line before entering the trade. (An example of the full crossover that we are looking for can be seen in the red circle on the chart above.)
Now comes the patience and discipline part of trading.
Entering the trade ahead of time may work out…or it may not. Waiting for the crossover to occur before entering the trade may work out…or it may not. However, there is a greater probability that the trade will work out if we wait for the crossover to take place.
One of my favorite trading axioms is “nothing happens until it happens”.
Bottom Line: Be sure to wait for your entry signal to “happen”.
--- Written by Richard Krivo, Trading Instructor
To contact Richard Krivo, e-mail firstname.lastname@example.org.
Follow him on Twitter at @RKrivoFX