Here’s a MACD indicator divergence trading strategy that’s a little different than what you’ve seen before, but it works beautifully. This MACD histogram tutorial video provides you with some excellent day trading and swing trading methods. Whether you trade the Forex, the stock market, or E-minis, this tutorial may help take your trading to the next level.
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Today we are going to talk about the MACD indicator divergence trading strategy, and why it often doesn’t work and when it can work.
First of all let’s talk about why they don’t necessarily work. Lot of people use them as an entry for going long or short. For example here we have a little bit of a higher high, and then we go down to the MACD indicator, and MACD has a lower high. So that’s your divergence, and does it work well?
It looks pretty good, doesn’t it? By the way, you’ve got two very red bars there, and so you can look at your candle stick bars and say wow, yup we’ve got wide range bars. Very bearish bars, and even volume is picking up as we go to the downside. It’s looking pretty good on many different fronts, and then of course the market comes around, and up, does seem to go down a little bit. Wait, wait, wait, no, going back up, up, up, up, up, up. Okay, so did not work, made a higher high after that.
MACD INDICATOR HOW TO USE IT
The MACD indicator is made up of traditionally 2 lines and also the MACD histogram, but you can add a third element as well. You’ve got your MACD line, I’ve got it red here, and the MACD line is simply the difference between two exponential moving averages. And I’ve got them up here, these are the traditional numbers, 12 and 26. So the difference between these 2 moving averages will be your MACD line.
I’ve got them plotted here the green line is the 12 period EMA. And the red line is the 26 EMA. When they cross, such as right there, then your MACD line, the red line will cross the 0 line. And the 0 line is right there. That’s the first thing is that that’s what the 0 line means is that there is 0 difference between these 2 moving averages.
As long as there is space between those 2 moving averages, in this case with the 12 EMA above the 26 EMA. Then the MACD line, my red line will be above 0. Now the black line here, that’s called the signal line, and that’s just a 9 period moving average of the MACD line of the red line. It’s just a 9 period moving average of the red line.
THE MACD HISTOGRAM
That’s how you read the indicator, now you can also put in, what they call a MACD histogram or, that’s a horrible name for it, it’s really, histogram just is a way of plotting something, and you can plot pretty much anything as a histogram. But a lot of times, the indicator is called a histogram
A better term, far more accurate term would be the difference or “diff” because that’s plotting the difference between these 2 lines. MACD line and the signal line, we are not going to talk about that today. But I want to just focus on our topic of divergences here today.
MACD INDICATOR DIVERGENCE TRADING STRATEGY THAT DOESN’T WORK.
We saw that didn’t work. That’s because that now that you understand how the indicator works. All this is doing is measuring acceleration or deceleration. The MACD stands for Moving Average Convergence Divergence. And that is an excellent term for it, because it is measuring the space between these 2 moving averages.
The 12 moving averages moving away from the 26 moving average, you see then that your MACD line will be going up. Now, so there is a lot of space, here it’s getting bigger and bigger, and then it doesn’t get so big, right. What happens is they don’t cross or anything, but now they are actually converging a little bit. The space between them is not as big.
THE MACD INDICATOR STRATEGY MEASURES ACCELERATION
So it’s getting a little bit, you know what, let’s bring this really big upscale here, and maybe we can show it a little easier. So in other words the difference here, you see it’s, well you can see, even on the 12 period moving average. Kind of angles in, whereas before it’s angling up, and then it angles back in. so that’s why the MACD line kind of goes flatter here. It’s just because the distance between the two lines is starting to close a little bit. Okay, then they open back up again and the MACD line starts going back up. So it’s measuring acceleration, if you will.
So you have to ask yourself well how significant, is that really in the market move? Does that mean the market’s going to reverse, just because 2 moving averages started coming closer together a little bit? The market go through cycles, they wiggle up, they wiggle down. They oscillate up, they oscillate down.
DAY TRADING OR SWING TRADING THE MACD INDICATOR DIVERGENCE
If the market was in continual, acceleration move, it can only sustain that for so long. A trend accelerating and continuing to accelerating without taking any rest is really not sustainable. And those usually turn into exhaustion moves in fact.
A trend that is more sustainable, that will last longer has these natural oscillations of acceleration, deceleration. And that is actually a healthier trend or a more sustainable trend, a trend that can last longer because people are coming in over more period of time. If you have everybody coming all at once, then you know essentially theoretically there is nobody left to come in. and the trend ends sooner.
Then we come over here and we got another one. Now that one works out pretty good. So here if we look at this one really quick, you’ll see that we have a higher high and MACD a lower high. So here is the big question, how would we determine that this one we looked at before, would not work, and this one would. Some people call this a triple divergence MACD indicator divergence trading strategy.
WHICH MACD DIVERGENCE STRATEGIES WORK AND WHICH DON’T
This is where our first divergence was right here. And if you’ll notice, what I’ve done is I brought up a weekly chart of the same market over on the right now. And this is going to be our key, is that we are going to be watching MACD on the longer term chart as well.
We have the daily on the left, weekly on the right. Here is our first divergence, and if you’ll notice MACD is coming down a little bit because there’s a little bit of a retrace on the weekly. But again that’s normal. Normal oscillations. And that one did not work. But MACD is still up, and it’s still above its signal line, and so the market continues to go up.
There are several confirmations:
- We get the MACD line crossing below the signal line on the weekly chart.
- There’s a nice candlestick pattern on the daily, but we had that on the previous signal as well.
- The market is getting below both moving averages. We are getting below the 26 EMA on the daily chart. And we had that opportunity as well over on the last one.
MULTIPLE TIME FRAMES PROVIDE EXCELLENT CONFIRMATION
What’s most important is that we have multiple timeframes confirming this trade. And the cross of the MACD line with the signal line on the weekly, that’s what I am looking for. I’ve found it to be the best MACD indicator divergence trading strategy.
Give it a try, I think that you’ll find that it’s a much more precise way of conforming your setups, whether they’ll be MACD divergences or anything else on the shorter timeframe.
By the way, if you’re interested in the indicator that I use personally for very precise entries and exits. I’m happy to share that with you. Just send me an email at Barry@TopDogTrading.com, and I’ll show you how to get access to that indicator.
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