MACD loses money in a sideways market and if we can do something to identify that the market is so, then we can get the MACD to ignore trade signals until it appears to be trending again. The use of Bollinger Bands can help identify sideways markets it seems.
– If the price has moved outside the Bollinger bands, then it is likely that a trend is starting.
– The bands contract when the market is slow and expand when the market moves.
RSI (relative strength index) can also be used to indicate trend strength. If the indicator hits the oversold/overbought values (30/70 typically) then the market will turn directions. Therefore, if the RSI values stay near the middle (40-60) then that probably means it is a sideways market.
However, it appears that according to the rollercoaster link below, RSI is not very effective on short times frames (under 4h).
Backtesting for the AUD/JPY over the month of May, there was a sideways market between the 19th to 22nd and 3 bad trades were placed. Both the Bollinger Bands and RSI strategies mentioned above would have only stopped 2 of the 3 bad trades, and worse I think they wouldn’t have opened the next winning trade. BB(20) and RSI(14) but should be optimized.
Idea: There might be something to the Bollinger thickness though. Perhaps if we were to define a custom thickness (distance between the two bands) that if exceeded indicates a volatile market. This may work… Need to test different deviation values too!
Idea: Calculating the gradient of the slow moving average might be an idea. This can determine if it is flat or not – flat of course meaning sideways market. Also if the market is turning around the slow moving average could be flat like on 23rd May 2013 16:00
Note: research showed ADX can help detect sideways markets but it appears to be too laggy and opens wining trades way too late.
Idea: Some other ideas that I have read about in ‘Handbook on Forex Trading – Nicholas Tan’ is to
a) introduce a 3rd moving average with longer timeframe to represent the longer trend and if the two faster MAs signals don’t match the longer moving average then ignore it… or
b) add a -/+ percentage offset, like 2%, to your moving average to create a band (similar to Bollinger bands) and if the price moves outside the band then a trend is forming.