The MACD Divergence Strategy

The MACD is a versatile trading tool that can reveal price momentum and also help in the price trend and direction. They are greatly used and respected in the world of currency exchange as a powerful indicator to provide buying or selling signals.

Trading the divergence is greatly popular way to use the MACD, however, like all indicators they are not always accurate. A good way of reducing those fake signals is by using the MACD histogram with an extra tool that I have been using in my trading system, the 50 EMA & 89 SMA. The histogram, with the help of the 50 EMA & 89SMA will be used for entry signals thus increasing your probability of success.

The following strategy is very simple to implement and is one of the strategies that I have used and still use occasionally to date. It works on both 1-hour and 4-hour charts.

Step 1- Pull out a 1-hour chart with a 50 SMA (yellow line) and MACD with default setting (12,26,9).

Your MACD graph should now look like picture below:

Buy signals – A buy signal will be triggered only when the following four rules are met:

• Divergence occurs (price trading lower than what indicator is showing)
• Signal line (red) of the MACD has crossed the 89 SMA (dark turquoise) from below and heading up
• The Histogram line (green) has pierced through the 89 SMA and is clearly above it (Extra confirmation when histogram is above zero line, red line & 89 SMA)
• Finally price opens or is trading above 50 EMA.

Example shown in screen shot below:

• Divergence occurs (price trading higher than what indicator is showing)
• Signal line (red) of the MACD has crossed the 89 SMA (dark turquoise) from above and heading down
• The Histogram line (green) has pierced through the 89 SMA and is clearly below it(Extra confirmation when histogram is below zero line, red line & 89 SMA)
• Finally price opens or is trading below 50 EMA.

Screenshot below:

Discipline is the key to success.

Happy trading,