Forex Trading Articles
USING MACD DIVERGENCE IN YOUR FOREX TRADING
By Vic Noble for Forexmentor.com
2006, Currex Investment Services Inc.
Dec 14, 2006
We’ve all heard lots about watching for MACD divergence as a tool for considering a trade possibility in a particular currency pair. But there are some important observations that you should make before committing your money, so let’s take a look at this concept in greater detail.
First of all, let’s be clear about what constitutes MACD divergence. In the case of negative divergence, we simply look for a nice run up in price, and where we have new wave highs being made in price, we observe that the corresponding highs in MACD are waving lower. The opposite is true for positive divergence. The chart below is an illustration of MACD negative divergence:
Now here’s an important point. After hundreds of personal coaching sessions with clients, I have noticed that sometimes a trader will say that there is MACD divergence happening before the MACD line has actually crossed above the trigger line. This is a wrong assessment! You don’t know you have negative divergence until the MACD line crosses below the trigger line. So just be aware of that pitfall.
Important Additional Considerations with MACD Divergence
If you simply look for MACD divergence without any other considerations, in my opinion you are not aligning yourself with the best odds, so I’d like to pass on my observations about MACD divergence that I think really increase the odds of making a successful trade.
First of all, a good, strong run in price preceding the MACD divergence will usually produce a stronger move following the MACD divergence. Where you have MACD divergence in a choppy, ranging type of market, I’ve found the reliability to be more suspect. Also, MACD divergence tends to yield more sizeable moves following a strong run in price.
Another way to greatly increase the odds of a winning trade is to observe the higher time frames before committing to a trade based on the lower time frame MACD divergence. For example in the case of negative divergence on a 15 minute chart, if you observe that the hourly, and/or 4 hour and/or daily chart has met a major resistance area, or is perhaps showing negative candlestick action, then the probability of a successful trade based on MACD negative divergence on a lower time frame at this point increases.
And finally, when looking to trade MACD divergence, it is very important that you enter the trade correctly, so that you have a good risk/reward ratio, ie, you want to take a trade that has more profit potential than what you’re risking. If you understand how to enter properly, you can measure your risk/reward before you enter a trade. That way, you can only choose to take trades that offer a favorable ratio.
When used correctly, MACD can offer huge profit potential. As you know, Peter mentions in his course that if this was the only way you ever decided to trade, that this alone would offer a very sound trading campaign!
Thanks traders, and remember, above all, control your risk!!
Forexmentor Personal Coach
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