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 must make 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 GBPCAD pair below…
Having already checked the Daily chart on this pair, we know it is in an uptrend as price action is above the 200 SMA (green line), it is making higher highs and higher lows and the GBP is stronger than the CAD at the time of the analysis.
Based on that, we know we want to buy the pair and for our entry signal we will use a MACDcrossover on the 4 Hour chart.
In the purple circle on the chart above, we can see that the MACD line in red (partially obscured by the green histogram bars) is poised to crossover the Signal line in blue to the upside.
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 completely crossover the Signal line to the upside before entering the trade. (An example of the complete crossover that we are looking for can be seen in the black circles on the chart above.)
Now comes the patience and discipline part of trading.
Some traders will let anxiety and impatience get the best of them at a time like this. They will talk themselves into the “fact” that the crossover will likely take place. What’s their rationale behind this conclusion? They really, really want the crossover to take place…nothing more, nothing less…they WANT it to happen. So much for technical analysis…
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. The point is that there is a higher 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 technical entry signal, whatever it may be, to actually “happen”.
--- Written by Richard Krivo, Trading Instructor
To contact Richard Krivo, e-mail email@example.com.
Follow him on Twitter at @RKrivoFX