Photo Credit: M. B. M. On Unsplash
The MACD Divergence Convergence Trading Strategy
Understanding MACD convergence divergence (often referred to as the MACD Crossover — although that is an altogether different trading strategy) is an easy, useful, consistent trading strategy to learn; especially for new traders just starting out Swing Trading.
When the price makes a lower low, while at the same time the MACD is making a higher low — this is referred to as bullish divergence.
Conversely, if the MACD makes a lower high and the price makes a higher high — this would be considered bearish divergence.
It doesn’t matter if you see a Bearish or Bullish set up — both can and will be profitable if you learn how to properly execute the trade.
Well, profitably will also be determined based upon how good you get at spotting if what you’re seeing is an actual MACD Divergence set up and not a fake.
Trust me, it’s very easy to see what you want to see — not what’s actually there.
Fortunately, that’s why I wrote this article.
A quick side note
I’ve seen far too many bad ones out there claiming they have “the secret” to using the MACD trading strategies.
Btw. . . There is way more than one MACD strategy, but we’ll address that later.
The truth is, many of them are wrong about how to use this strategy, (and this is of course not financial advice — I’m not a professional, licensed stock trader), so I want to educate people the correct way to use it.
This is real money we’re taking about here. People’s livelihoods are at stake when they read bad information online, so please, be careful. Always verify what you’re reading is correct — do research after you read an article.
Even this one!
Now, let’s get back to it, shall we?
Divergence, either bullish or bearish, almost always happens right after a sharp price movement in the asset you’re charting.
At it’s core, divergence is a sting sign that the price might reverse. One way you can add more weight to the potential reversal is if the move is followed by a trendline break.
These two events occurring — one confirming the other — are crucial for a MACD swing trading strategy.
Understanding what MACD convergence divergence is will greatly enhance a trader’s strategy and the consistency of their winning trades.
Bullish Divergence With Trend Line Break
Image of Chart & Photo Credit: admiralmarkets
Notice the MACD in accordance with the price. Also note the trend line break — the confirmation that we’re looking for as our entry signal.
Bearish Divergence With Trend Line Break
Image of Chart & Photo Credit: admiralmarkets
Notice in this chart we essentially have the same thing occurring, except switched around. This is a confirmation of a bearish MACD Divergence confirmed by the trend line breaking down.
Always remember — MACD is mostly used as a momentum indicator, best utilized in volatile markets or on an asset trending strongly, one way or another.
That may sound counterintuitive — that the MACD is most useful either in a volatile market or a consistent trend — but that’s just the way it is.
At least, it’s how this strategy has worked for me, as well as countless others before me. A few years ago, when first starting out trading, I was taught this very strategy by a friend of mine who was a very successful investor.
Ever since I learned to identify MACD Divergence Convergence in stock charts, (as well as how to confirm it), well, let’s just say that I’ve yet to be disappointed with the results of this trading strategy.
Conclusion
You can never count on one trading strategy for all of your trades. Even when you see the perfect formation setting up right in front of your eyes, all the stars are lined up and it seems the stock market gods themselves have blessed you with the perfect trade — IT CAN STILL GO WRONG!
This has happened to me more times than I like to count. It’s better to just understand this, accept it, and then move on.
Just take some comfort that knowing these useful strategies will drastically lessen the odds of you losing on your trades. There’s no such thing as a full proof trading strategy.
If someone tells you otherwise, then run!
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By: Steven Tyler
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