Futures Trading System: MACD Divergence and Swing Trading System

Designing a futures trading system is not an easy task, nor is it an endeavor that requires the mastering of only one tool. Generally, trading systems are composed of a number of tools that you are comfortable and productive with, all mashed together to produce something that lets you take decisive actions. On this page, I will outline a trading system that I use frequently. We will look at an example using no.11 sugar futures over several weeks to identify trading opportunities. The opportunities outlined in the example are opportunities I would trade myself. Although I did not trade them all, usually because I was off doing something else when they occurred, I did trade some of them. Specifically I traded four of them, 4 out of 14.

There were fourteen trade opportunities consisting of:

  • One buy opportunity (MACD-price divergence; divergence #1)
  • Four buy opportunities (4 green arrows, swing trading strategy)
  • One sell opportunity (MACD-price Divergence; divergence #2)
  • Three sell opportunities (3 red arrows, swing trading strategy)
  • One buy opportunity (MACD-price divergence; divergence #3)
  • Three buy opportunities (3 green arrows, swing trading strategy)
  • One sell opportunity (MACD-price divergence; divergence #4)

Here we can see the futures trading price chart we I will discuss the futures trading system. It is a March 2012 no.11 sugar futures chart on a 60min bar time frame (each bar is one 60min period), so the futures trading system can also be applied as one of many day trading strategies. The entire chart cover approximately six weeks worth of data.

futures trading system

Let us first review some futures trading system theory. To understand what is going on in this chart you should be familiar with MACD-price divergences. If you are not, read this page MACD Divergence Trading Strategy.

Once are comfortable with what an MACD-price divergence is and how to spot one, you must be sure that you are familiar with the idea of swing trading. If you are not, read this page Swing Trading Strategy.

Divergence #1

OK, now that we are all up to speed we can go step by step through the sugar futures trading chart. We will start with MACD-price divergence #1. When you are trading in this way, you can either use these MACD divergences as trading opportunities, or you can use then simply to tell you to start or stop looking for swing trading opportunities in a certain direction. With divergence #1, let us just use it as a signal to start looking for new trades.

Divergence #1 has told us that prices are bottoming and we should expect and upwardly directed price movement. It is confirmed as prices move towards the upper channel line, and as then correct downwards fail to make a new low below the 23.00 mark. This occurred just before the first green arrow. Between that point and the next MACD divergence (divergence #2), there were four buying opportunities. These opportunities are based on the swing trading strategy. They were safe buying opportunities because we had not yet seen another MACD-price divergence form to tell us that a price direction reversal was taking place. Entries should have taken place on or near the yellow moving average. On any of the four entries, exits should have been planned any time the price got anywhere near the purpler upper channel line.

As soon as you see that the higher price highs are not corresponding with higher MACD highs, that is your cue to STOP making buy-entry swing trades, and to start LOOKING for the next MACD-price divergence telling you to switch buy/sell attitudes.

Divergence #2

Now, lets look at MACD-price divergence #2 and what follows. We saw prices make higher highs, and the MACD fail to reciprocate. Then, we saw prices tumble towards the purple bottom channel line. This was our clue that a downward price direction would follow. The signal was confirmed when prices rallied and failed to make a new high just before the first red arrow.

We then see three selling opportunities as prices approach the yellow moving average. These are safe sells because we have not yet seen an MACD-price divergence telling us the downward movement is at an end. Entry on the sells should have taken place at or near the yellow moving average, and exits should have taken place anytime the price got anywhere near the upper channel line.

Divergence #3

Following the futures trading system, it's not too long before we start to see another (#3) MACD-price divergence forming. This time, we see a clue in the MACD histogram failing to make new lows before we see corroboration in the MACD moving averages. Again, this is our cue to STOP looking for sell-entries and start looking for and MACD-price divergence bottoming signal. Sure enough, it happens shortly and we are re-positioned into an upward looking price movement attitude.

Next we see three buying opportunities indicated by the three green arrows. The third of which was "iffy", as in all aspects of life we have to make decisions on whether or not to "risk it". In this case it would have resulted profitable, in other cases it won't, so be careful and vigilant.

Divergence #4

It's not long then, that we see our fourth and last divergence (divergence #4). In this particular case, I did in fact put on a sort trade that resulted profitable. I shorted at 24.60 and covered at 24.30 for a 0.30 profit in about half a day.

You now have seen how to combine a variety of indicators and futures trading strategies to create a futures trading system. Find a market where this futures trading system works for you in, and practice it on paper until you are comfortable. Don't forget to use stops, or some other type of risk mitigation strategy. Don't forget to plan your exits, either on stops or on profit targets (the channel line).

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