MACD Divergence On A Shorter Time Period Is A Much Stronger Signal
When the MACD black line crosses above or below the MACD signal grey line, it is known as a cross or crossover. When the MACD black line crosses above the signal grey line, it is supporting a long position. And when MACD black line crosses below the signal grey line, it is supporting a short position.
The cross of the MACD black line and the signal grey line near the zero line is very important as it gives information about the current trend in the market. When the MACD black line crosses below the signal grey line below the zero line, it is a sell signal in the direction of the present trend in the market. On the other hand, when the MACD black line crosses above the signal grey line above the zero line, it is a buy signal.
Another way to use MACD is to get signals called Divergence. A divergence occurs when the price is going in one direction and MACD is not confirming that direction. When the price action is making lower lows and the MACD is making higher lows, it is known as a Positive Divergence. Similarly, when price action is making higher lows and the MACD is making lower lows, it is known as a Negative Divergence.
You must keep this in mind that in a strong market, it is not uncommon to see a double or triple divergence before the market makes a correction or a trend reversal. Divergence over a shorter period of time as a rule of thumb is more powerful than divergence over a longer period of time.
Always think of a divergence as a development that indicates that the market needs to take a break. Although most market reversals exhibit divergence before they take a turn, markets also exhibit divergence just before normal consolidation periods.
Now, you will also find divergence between the MACD histogram and the price action. This divergence should be considered significant. Short term divergence appears on the histogram much earlier and is considered to be more significant as compared to the MACD regular divergence.
First gauge the direction of the current trend on the price chart. Now look for the MACD to confirm that direction. Gauge the momentum of the trend with the histogram. The MACD histogram should be on the same side as the trade. As long as the momentum exists stay in the trade to let the profits run. If you get the MACD cross on the same timeframe that you took the signal, exit your position.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Get this highly profitable Magic Breakout Forex Strategy by Tim Trush and Julie Lavrin FREE. Get these Correlation Trading Cheatsheets FREE.
by: Ahmad Hassam
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Date: Tue, 21 Dec 2010
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