MACD Divergence Strategy

The MACD divergence strategy(Moving Average Convergence/Divergence) is easily one of the most popular trading strategies out there, especially when it comes to Forex trading. Conceptualized by Gerald Appeal back in 1979, the MACD divergence strategy remains widespread till date, thanks in particular to its flexible and simple nature. Understanding the MACD divergence strategy is fairly simple. In line with the full form of the acronym, we are essentially looking at the difference between exponential moving averages or EMAs of investment instruments over a 12 and 26 day period. The straightforward benefits that accrue from the MACD divergence strategy include:

• Getting a good idea of the direction that the price of the asset is going to take.
• It also provides cues on the intensity of movement that the price of the asset would make.
• The MACD divergence strategy is also an excellent pointer towards situations where trends might witness changes.

Without a doubt, these are priceless advantages that traders consistently look for which is why the MACD divergence strategy has gained so much traction among them. Grasping MACD Graphs When looking at the MACD divergence strategy, it would only be pertinent that we get a firm grasp on MACD indicators as showcased on graphs. These graphs typically contain three critical data points – the signal line, the MACD line, as well as a histogram that clearly plots the difference between the signal and MACD lines. This aspect will be very clear when you look at the chart below:

Courtesy: MetaTrader 4 from MetaQuotes Software Corp.

In the above chart: 1 = Signal line 2 = MACD line, and 3 = Histogram Making the most of the MACD divergence strategy For traders, it is crucial that they not only know the nuances of the MACD divergence strategy as described above but also make the most of it. Accordingly, some techniques that traders would find especially very useful include: Reversal strategy This is an MACD divergence strategy that involves being able to correctly foresee when an asset such as a forex pair would reverse in its price. Yes, such foresight is rather hard to gain but with time – especially with the principles of the MACD divergence strategy in mind, it gets easier. The importance of this strategy lies in the fact that one can make reasonable fortunes within a short span of time if one is able to predict reverses accurately. Trend strategy This strategy involves getting a good idea of market trends that are prevalent based on which asset classes such as forex pairs are likely to behave. Typically, this is a strategy which is useful over a longer period of time as opposed to a short one. For instance, you might take the 200 day moving average and then be able to foresee the trend that is prevalent, based on which you place your trades. Conclusion The MACD divergence strategy is clearly in a league of its own as a forex trading strategy in particular. That is because even as a solitary indicator, it brings to the fore both trend and momentum, which in turn can easily be applied over daily, weekly, or even monthly time periods. As mentioned in the beginning, MACD usually looks at the difference between 12 and 26 day EMAs, with the 9 day EMA serving as a pointer towards situations where one may buy (with MACD above the 9 day EMA) or sell (when the MACD goes below the 9 day EMA). These MACD indicators, standard being 12, 26, and 9 can even be changed; the chart below will give you a good idea:

Courtesy: MetaTrader 4 from MetaQuotes Software Corp.

1 = MACD line 2 = Signal line