Moving Average Convergence Divergence, short for MACD, is a famous leading indicator developed by Gerald Appel in 1979. This indicator consists of a histogram and an exponential moving average, widely applied to track the trend momentum like every other leading beacon. Nevertheless, hiding behind this powerful indicator is a countertrend trading system called “Divergence MACD”, which is considered one of the most effective knife-catching strategies by professional traders. Today, we would like to guide you in detail how to use this countertrend technique to collect trading signals.
First, let’s break down the “Divergence”. It is the situation when market performance and trading volume contradict each other. Normally in a trend, prices move with a rising volume. The stronger the trend is, the larger the volume is. However, there are some periods that prices keep moving with a decreasing volume. Those represent divergence. If the trading volume doesn’t back the market performance, those movements are considered uncertain, highlighting that the trend is losing its momentum and potential reversals are coming. We can take advantages of those reversals.
As far as we know, MACD with the default setting of 12, 26, 9 is the best. Professional traders usually combine MACD with price action to gather more reliable trading opportunities.
Trading divergence is really profitable. Using only the “Divergence MACD” technique, we have earned more than 5000 pips over the last 15 months. The win-rate of the system is confirmed around 85%.
How to trade divergence with MACD
Divergence appears on every chart from one-minute to one-month and can be found on all currency pairs. You can start to seek for divergence right after installing the built-in MACD indicator in Metatrader 4.
A bullish signal is determined when:
In a downtrend, prices develop a lower swing low.
At the same time, MACD’s histogram forms a higher swing low.
There are two or three candlesticks showing that the bearish trend’s momentum is weaker.
On the contrary, a bearish occasion is spotted when:
In an uptrend, prices develop a higher swing high.
At the same time, MACD’s histogram forms a lower swing high.
There are two or three candlesticks exposing that the uptrend’s momentum is weaker.
There are some important rules when using this system as follows:
Only one position should be entered at a time.
The pump candlestick must be fully closed to confirm a signal valid.
The larger the time frame is, the more reliable the detected occasions are. We suggest trading the “Divergence MACD” system on the one-day chart with orders’ stop-loss set of 50 pips and take- profit established of up to 200 pips.
Pros and cons of the strategy
Easy-to- use, general-purpose.
Generating highly reliable trading signals.
Helping trader catch a whole new trend.
Not necessitating traders to keep eyes on the trading platform.
Requiring a high level of patience.
Containing risks of a counter-trend strategy.
Despite the fact that trend-following is the most effective trading principle, the “Divergence MACD” system, with advantages mentioned above in addition to a good testing result, has shown itself to be a profitable strategy. However, as a counter-trend strategy, it still carries potential risks. We suggest that you should only use this strategy given being proficient in technical analysis. Besides, risk controlling and psychological managing methods are also required.
FinmaxFX is one of NAFD (National Association of Forex Dealers) initiators.
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