MACD Divergence Trading System

A bearish divergence occurs when prices rise higher but the MACD can’t move higher.

A bullish divergence occurs when prices fall but MACD can’t fall any deeper.

Here’s an example. Imagine there is an uptrend in the GBP/USD 15 minutes chart with the MACD also moving up. This is a natural process during a strong uptrend. Although, prices don’t move in a straight line up but, instead, they have retracements or pullbacks. In our example, the currency pair retraces as well as the indicator. When prices start to go up again, passing the previous high, the MACD goes up as well, but doesn’t reach the previous high. This means that the indicator is showing that the trend is losing steam and you should look for a short sell opportunity. This is called a bearish divergence. Bulls start losing steam, so the trend can reverse. On the opposite side, consider a chart with a clear downtrend, both on prices and MACD. Both reach a low point and both pullback. When the downtrend returns, MACD follows the price but can’t reach a new low even when prices reach a new low. This is a bullish divergence and shows us that bulls are gaining strength. A trend reversal can be near.

The Rules MACD Divergence Trading System:

In this strategy, we will look for bullish and bearish divergences and we will use a stop loss at the most recent low or high, respectively. To confirm a trade, we will use the MACD-Histogram. We will only place an entry order if this indicator has already reached its centerline (the zero line) before the divergence is completed to avoid false trades. If we have a divergence that accomplish all our requirements, we will enter the trade when the MACD- Histogram is below its centerline (the zero line) and upticks (for long trades), and when the MACD-Histogram is above

its centerline (the zero line) and downticks, we will have a short sell signal. We will also be using the MACD-Histogram for exiting positions. When we are in a trade, as soon as the MACD- Histogram gives an opposite signal, we will exit the trade. This strategy works better on 4 hour or daily charts, and you can use it on any currency pairs.

Let’s take a look at some examples:

Entry: Buy GBP/USD at 1.7388

Stop Loss: At the most recent low

Exit: 1.7515

Profit: 127 pips

In this GBP/USD 4 hour chart, there is a downtrend until the moment the currency pair reaches point 1. At this moment, GBP/USD retraces as well as the MACD- Histogram. During the retracement, the MACD-Histogram reaches point 2 (above its centerline). Afterwards, the price starts to move down again as well as the indicator. At point 3, there is no divergence because neither prices nor the MACD-Histogram reached the previous low. The currency pair starts to fall again reaching a lower low. But, as you can see at point 4, although the MACD-Histogram is declining along with the price, it stays at the same level as at point 3, the previous low. Prices are below point 1 but the MACD-Histogram is clearly above that value. Since the MACD-Histogram didn’t manage to go lower,there’s clearly a bullish divergence and the prices tend to go up.

We should then insert a buy order at 1.7388 as well as a stop loss order below the lower price reached during thebullish divergence formation. This buying point occurs when the MACD-Histogram starts to rise while it is still below its centerline. After entering the trade, you should continue to monitor the MACD-Histogram because it will tell you when it is time to exit the trade. As you can see at the chart, the bullish divergence originated a good uptrend. At point 5, the MACD-Histogram gives the first exit signal – it gives a downtick above its centerline (the zero line). Close the trade at 1.7515, with 127 pips profit.

Entry: Buy GBP/USD at 1.8231

Stop Loss: At the most recent low

Exit: 1.8409

Profit: 178 pips

In this 4 hour chart, the currency pair was in a downtrend and reached a new low at point 1, as well as the MACD- Histogram. At point 2, there isn’t a bullish divergence yet, since the price is higher than at point 1. After this, prices moved down, as well as the indicator, and reached a bottom at point 3. At this point, prices are much lower than at point 1, but the MACD-Histogram is higher. This is a bullish divergence. We should enter our buy order at 1.8231, when the MACD- Histogram upticks while it is still below its centerline. We should also enter a stop loss below the most recent low. After entering the trade, once the MACD-Histogram gives a downtick above the centerline we will exit the position. This happened at 1.8409.

Entry: Short GBP/USD at 1.7861

Stop Loss: At the most recent high

Exit: 1.7677

Profit: 184 pips

In this GBP/USD 4 hour chart, prices are in an uptrend and reach a top at point 1. At point 2, as the MACD-Histogram crosses below its centerline, it may form a bearish divergence. After point 2, prices continue their uptrend as well as the MACD-Histogram. Although prices reach a higher high than point 1, the MACD-Histogram doesn’t reach the same level (point 3). We are now looking at a

bearish divergence. We will enter a short sell order at 1.7861, when the MACD- Histogram gives a downtick while is above the centerline. After entering the trade, we need to closely look at the MACD-Histogram. We will cover our short sell when the MACD-Histogram is below its centerline and upticks. This happens at 1.7677. This trade gave us 184 pips profit which means $1840 for each single currency pair you’re holding.

Entry: Short EUR/USD at 1.2153

Stop Loss: At the most recent high

Exit: 1.2077

Profit: 76 pips

At point 1, EUR/USD is in an uptrend just like the MACD- Histogram. While prices are in a range bound, the indicator is falling until it reaches the centerline at point 2. At point 3, prices are at higher values, but the MACD-Histogram can’t reach its previous high. Once the MACD-Histogram downticks above its centerline, we will place our short sell order (1.2153), as well as our protective stop loss. After entering the trade, we will wait until the MACD- Histogram to cross below its centerline and upticks. This happened at 1.2077 (point 4). We closed this trade with 76 pips profit.