Filtering Trading Signals with Macd, Rsi, Pivot Points and Ema

Training: Trading strategies in practice

The trading system we are considering this time is a simplified and prepared for easier perception form of one of the popular tactics on the Internet. So, it includes the following tools:

- exponential moving average (EMA);
-          MACD indicator;
-          RSI indicator;
- support/resistance levels. In our case, these levels are set by the indicator Pivot.mq4 or DJLines.mq4, which are available by default in the MetaTrader 4 trading platform.
- working chart: GBPUSD, 5 min.

Let's break down each element separately

Stage 1. First, we identify key support/resistance levels and Pivot Point:

PP = (High + Low + Close) / 3

Support levels S1, S2 and resistance levels R1, R2 are considered as follows: 

S1 = (PP x 2) - High
S2 = PP - (High - Low)
R1 = (PP x 2) - Low
R2 = PP + (High - Low), 

where High, Low, Close are taken for the previous day. These levels will serve as a clue when working on a rebound/breakout of the level, or for profit taking, as well as for confirmation of the trend. To take buy signals, the price should be above the Pivot Point. If it is below it, we process only sell signals.

Figure 1. Example of working with Pivot Point.

Stage 2. Next, it is necessary to check whether the market is flat: if it is in a narrow corridor of 30-35 points, such a movement is interpreted as Flat. If the corridor is wider, we're facing trendand our CU has a use for it.

Figure 2. Example of market state definition.

Stage 3. Then we determine the long-term trend. For this purpose, we sketch the EMA(150) on the 5-minute chart. If the EMA is rising, we only take the buy signals on the standard MACD (12, 26, 9).

Stage 4. To filter out false MACD signals, we add to the indicator a plus and minus level of 3 points above and below the zero line. The signals that arrive between these levels are immediately rejected as false. The explanation for this technique is very simple: when the price is in the fluteThe exponential moving averages 12 and 26, which are used in this indicator, tend to intertwine very often, thus giving a lot of false signals. When coming out of flat in a good trend, MACD, as a rule, does not deceive. For this purpose, we take levels of 3 points on both sides of the MACD zero line.

Ethpap 5. We will also take RSI(14) to filter the signals. A bullish signal is valid only when RSI is above the level of 60, while a bearish signal is below the level of 40. The meaning of filtering is the same as in the case of MACD.

Let's look at an example. The first buy signal on MACD (crossing of its signal line by the indicator) arrives at 8.00 broker's time. According to the system, it fully meets the criteria: EMA is growing, the price has left the wide corridor, RSI is above 60, the price is above the Pivot Point.

Figure 3. Example of strategy operation.

Further, during the trading day, there are two more valid signals that fully meet the requirements we have set. 

StopLosses and TakeProfits In this system it is suggested to put equal 30 pips each, or to pull up the StopLoss as the price passes the next 30 pips by 75%. That is, if StopLoss is equal to 30 pips, then when the price reaches a profit of the same 30 pips, it is necessary to move it up by 30 * 0.75 = 23 pips, and so on with each price step of 30 pips when playing with multiple lots.

If we consider the current moment (see Fig. 4), we have the following picture: 

- EMA(150) is turning downward;
- MACD is below zero and below -0.003, which means that while the sell signal on MACD reversal is valid;
- The price has gone below the Pivot Point, fixing it will be another reliable confirmation of the sale;
- remains RSI(14): if the pullback is shallow, the RSI may well fall below 40 if the downward movement resumes.

In this case, our sell action will be fully justified. But if the conditions are not met, for example, EMA(150) will be directed sideways or upwards, and MACD will enter the zone from +0.0003 to -0.0003 and give a signal, and RSI will be between the levels 40 and 60, we will have to wait for clarification of the situation and compliance of signals with the requirements of our TS.

Figure 4. The only justified sell entry at the moment.