One of the main reasons we use MACD is to show MARKET divergence. Divergence occurs where on the main CHART the candles would be showing an upward trend e.g. a BUY, but on the MACD shows a downward trend e.g. SELL and vice versa. Below are a couple of examples of DIVERGENCE and what to look for.
This first example shows us at the following points :
This first example shows us at the following points :
1. Both the MARKET and MACD are showing an upward TREND with EMA10 above EMA20 (PURPLE over BLUE) on the main chart and MACD above SIGNAL on the MACD graph.
2. At this point we have DIVERGENCE. On the candle chart it is still indicating an upward or BUY trend (EMA10 above EMA20), but MACD is showing a downward trend with the RED line moving above the BLUE line.
3. At this point everything is back in synchronisation and both graphs show a SELL trend. The important thing to note here is that at point 2 it would indicate we should exit any BUY trade as the MACD is indicating a turn in the market.
3. At this point everything is back in synchronisation and both graphs show a SELL trend. The important thing to note here is that at point 2 it would indicate we should exit any BUY trade as the MACD is indicating a turn in the market.
Obviously it is very easy to see these trends in retrospect but if you notice at around 13:50 on the MACD graph the MACD line (BLUE) and MACD signal (RED) line crossed, hence indicating a possible MARKET turn. The precise exit of any trade would be down to you, but this MACD signal allows you time to figure out the best exit point. As you can see the BUY trend did peak again before the market turned, and this does happen on a regular basis. Another useful part of MACD is the histogram element which helps show the momentum of the market trend. As trend 1 grows and the bars get bigger giving confidence of the upward or BUY trend. As the histogram bars start getting smaller it indicates a slowing in the market and it then moves from GREEN to RED histogram bars showing a potential market turn is imminent, so a good indicator for exiting any BUY trade.
Another example below…This is a more subtle example, but again shows how MACD can show market changes.
At point:1. Both the main chart and MACD are in clear SELL trends. ON the main chart, the EMA10 is below the EMA20 hence SELL, and on MACD the MACD line (blue) is below the MACD SIGNAL line (RED) and in the lower half of the graph. Lots of RED histograms show the market momentum. As we reach this point, MACD cross the signal line which indicates a turn. We also see the histogram bars turn GREEN. However, the main chart still clearly has a SELL trend with EMA10 below EMA20. This this point the MACD is clearly showing a BUY trend and is in DIVERGENCE with the main chart which is showing a SELL trend, EMA10 below EMA20. At this point the market turns again into a SELL trend. So this example shows how this would indicate at point 2 to exit any SELL trade.
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