In the example I mentioned, we would have bullish divergence. We would have bearish divergence if price were making higher highs while the histogram or MACD line was making lower highs or double tops. Similarly, price could make a double top while the histogram or MACD line made lower highs.
In the image above, I marked the bullish divergence in green and the bearish divergence in red. Notice that I marked divergence when price was either down trending or up trending. I completely ignored the range bound period.
There are a couple of shortcomings to trading MACD divergence, and trading from a ranging market is one of them. During a ranging market, the MACD and signal line will cross the zero line frequently. You should avoid trading divergence, and possibly trading altogether, during these periods.
When traders first realize how powerful trading MACD divergence can be, they often make the mistake of trying to trade the MACD on its own. I donβt recommend this because the MACD can give many false positives on its own.
Instead, I recommend using MACD divergence strategies with other trading strategies β preferably ones that use leading indicators, like price action or support and resistance. The right combination of lagging and leading indicators can provide you with a real edge in the market.
In the image below, I marked the bullish divergence (green), the bearish divergence (red), and an example of bad divergence (gray). I also marked some entry signals. For the purpose of this article, we will be using price action signals in conjunction with the different forms of MACD divergence.
Instead, I recommend using MACD divergence strategies with other trading strategies β preferably ones that use leading indicators, like price action or support and resistance. The right combination of lagging and leading indicators can provide you with a real edge in the market.
In the image below, I marked the bullish divergence (green), the bearish divergence (red), and an example of bad divergence (gray). I also marked some entry signals. For the purpose of this article, we will be using price action signals in conjunction with the different forms of MACD divergence.
Starting from the left, you can see some traditional MACD histogram divergence. The histogram is making higher lows or double bottoms, while price is making lower lows. If we were using price action as our confirming entry signal, we would have skipped the first two examples of bullish divergence, because there were no bullish candlestick signals to confirm our entry.
The next two examples show both histogram and MACD line divergence. They also both developed bullish engulfing signals which could be used to confirm entry at each of those divergence points (click the image for a better view).
The next two examples show both histogram and MACD line divergence. They also both developed bullish engulfing signals which could be used to confirm entry at each of those divergence points (click the image for a better view).
Trading MACD divergence, if done correctly, can provide you with a real edge in the market. It can be a powerful early indicator of trend reversals when combined with another trading system β preferably a system based on leading indicators.
MACD divergence isnβt foolproof. This technique does not work well in range bound markets, and on its own MACD divergence will often give you many false positives. This is especially true when the market is trending strongly in one direction for an extended period of time.
It is important to only trade divergence signals that occur during periods of distinguishable higher highs or lower lows in price. Strong, parabolic moves in price, in one direction or another, with little to no retracement, do not make good divergence signals.
Are you trading MACD divergence correctly? Hopefully, this article shed some light on any mistakes you might be making with this popular trading technique. Like anything else in trading, you canβt expect to be an expert divergence trader overnight. Be sure to do plenty of backtesting and demo trading before trying any new trading strategy in your live account.
MACD divergence isnβt foolproof. This technique does not work well in range bound markets, and on its own MACD divergence will often give you many false positives. This is especially true when the market is trending strongly in one direction for an extended period of time.
It is important to only trade divergence signals that occur during periods of distinguishable higher highs or lower lows in price. Strong, parabolic moves in price, in one direction or another, with little to no retracement, do not make good divergence signals.
Are you trading MACD divergence correctly? Hopefully, this article shed some light on any mistakes you might be making with this popular trading technique. Like anything else in trading, you canβt expect to be an expert divergence trader overnight. Be sure to do plenty of backtesting and demo trading before trying any new trading strategy in your live account.
Guys you can read more about MACD Divergence, its a great tool.
Thanks for Listening
Thanks for Listening