Divergences between MACD- Histogram and
prices identify major turning points. These signals do not occur often, but when they do, they
often let you catch major reversals and the beginning of a new trend.
In my opinion the MACD divergence is
probably the strongest signal in Technical Analysis. You could probably make a living trading
the divergences only! MACD should be a copycat of the price action, and therefore macd will
also make a higher high same as a price action, if this pattern is not repeated then you have a
divergence.
When prices rally to a new high, but
MACD traces lower, this is a bearish divergence, this shows that the bulls are getting weaker, this
would identify a price weakness at market tops. The following is an example of a
Bearish Divergence.
Another example of a perfect MACD
Bearish Divergence
A possible entry at 1.8670,
The EMA crossover at 1.8295 will still
keep you in this trade; at this point the profit from the
trade was 375 pips.
You could consider closing the position
at 1.7970 when the 20 EMA starts to rise, this giving a profit of 700
pips.
At this stage the 20 EMA has not
crossed over the 60 EMA, so some of you may want to carry on with the trade. If you did so then you
would have had a perfect opportunity to close the trade at the Double bottom on 7/10/04 at 1.7760
– giving a total of 910 pips profit.
Not a bad trade, from divergence.
MACD BULLISH DIVERGENCE
If the prices fall to a new low but
MACD traces a more shallow low, it would mean that bulls are ready to gain control, and this would
identify strength at market bottoms. This is a Bullish divergence. They give buy signals when
most traders feel fearful about a breakdown to a new low! The following chart illustrates a
perfect MACD Bullish divergence on a EURUSD Chart
You could consider longs when the MACD
Histogram ticks up from its shallower bottom; while prices are at a new low, place a
protective stop below it’s latest low.
The higher the time frame of a chart in
which the MACD divergence occurs, this may result in a arger move.
For example in the above chart, at
around 1.2250 the peak of that rally had been 1.2850 –
thereby giving an overall gain of 600
pips. In this instance your entry points were much earlier
than the EMA 5/60 day crossover.
All the above strategies will work in
any time frame, so unlike me, if you enjoy the thrills
and excitement of watching your screens
for every second to catch 20 to 30 pips per trade, then you can certainly switch the charts to
a lower time frame, i.e. 1 minutes or 5 minutes.
Below the link for download MACD
Divergence indicator Metatrader 4
https://drive.google.com/file/d/0Bwjv2Pbf48itXzh3S2VEcGZ3enM/view?usp=sharing
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