Metatrader Indicator

Make Money with MACD Divergence in Forex Trading

MACD or Moving Average Convergence Divergence is one of the most used technical indicators in the world of forex trading. Created by Gerald Appeal in the year 1979, MACD is simple to use and very flexible as a momentum and trend indicator. Although this is widely used, many are still quite hesitant to trust the results here because most of the time it is not accurate. To make the most out of trading MACD divergence, you can use the indicator for both trade entry and exit signals. In addition, this will allow you to determine the position of the other currency traders.

MACD Definition

As mentioned above, MACD is an easy indicator to use and understand. It mainly gauges the difference between a 26 day and 12 day EMA or exponential moving averages. The former is the slower one obviously while the other is the faster one. To calculate the two values, the closing prices are used to determine the difference for the moving averages.

If you are using the MACD chart, you can check it now and you will observe that the 9 day EMA is also plotted. This EMA will act as the go signal for decisions of traders regarding the buying and selling of currencies. For instance, you will have to sell whatever currency you have at hand when the signal goes down to the 9 day EMA. Otherwise, you are going to purchase your currency pair.

Trading divergence often makes use of the MACD histogram because it helps them calculate momentum. The price movement that it detects will be determined easily so instead of using MACD to watch the direction of the current trend, the traders use it to detect the price movement’s strength.

Trading MACD Divergence

To start this, you will need to find the chart points wherein the current prices make the latest swing high or low. However, you should remember that this tool will not let you view the divergence between the momentum and the price of the currency pair.

Before you start trading divergence, you should bear in find that there is a greater chance that you will fail here. This is because just when there are profitable trends and trades, the traders are forced to exit their position due to the results in the MACD divergence indicator.

MACD Histogram Application

Because there is a great conflict in the values of the entry and exit signals, you can resolve this with the help of the MACD histogram. So for instance, if you will have to trade he negative divergence, you should take a fractional short position at the starting point of the divergence. However, you will do this in a different way unlike the conventional one, which compels you to set the stop at the closest swing high, which is reliant upon the price of the currency. Thus, you will put a stop on the trade when the previous swing high is exceeded by the MACD histogram. This is an indication that the momentum is currently in acceleration and the trader is actually committing a trading mistake.

The main reason behind why traders use MACD divergence as their forex technical indicator because it will lead to greater profits once the position is large. With trading as a challenging task, you will have to take advantage of this strategy but only if you understand the whole concept well.  Whether you are a day or position trader, it does not matter. As long as you have a methodical and logical approach, you can take advantage of the whole MACD divergence method in the forex market.

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This entry was posted on Friday, July 31st, 2009 at 10:05 am and is filed under metatrader indicator. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.