Determining whether a price move is sharp, slow, large or small requires looking at the velocity and magnitude of the price moves around it. Price momentum can't continue forever so as soon as the price begins to level off, the MACD trend lines will diverge for example, go up, even if the price is still dropping. After a strong price rally, the MACD divergence is no longer useful. By dropping, while the price continues to move higher or move sideways, the MACD is showing momentum has slowed but it doesn't indicate a reversal.
Had a trader assumed that the rising MACD was a positive sign, they may have exited their short trade , missing out on additional profit. Or they may have taken a long trade, even though the price action showed a significant downtrend and no signs of a reversal no higher swing highs or higher swing lows to indicate an end to the downtrend.
That doesn't mean divergence can't or won't signal the occasional reversal, but it must be taken with a grain of salt after a big move. Since divergence occurs after almost every big move, and most big moves aren't immediately reversed right after, if you assume that divergence, in this case, means a reversal is coming, you could get yourself into a lot of losing trades.
Traders also compare prior highs on the MACD with current highs or prior lows with current lows. For example, if the price moves above a prior high, traders will watch for the MACD to also move above its prior high. If it doesn't, that's a divergence or a traditional warning signal of a reversal. This signal is fallible and related to the problem discussed above. A lower MACD high-price level shows the price didn't have the same velocity it had last time it moved higher it may have moved less, or it may have moved slower , but that doesn't necessarily indicate a reversal.
As discussed above, a sharp price move will cause a large move in the MACD, larger than what is caused by slower price moves. An asset's price can move higher or lower, slowly, for very long periods of time. If this occurs after a steeper move more distance covered in less time , then the MACD will show divergence for much of the time the price is slowly relative to the prior sharp move marching higher. If a trader assumes a lower MACD high means the price will reverse, a valuable opportunity may be missed to stay long and collect more profit from the slow er march higher.
Or worse, the trader may take a short position into a strong uptrend, with little evidence to support the trade except for an indicator which isn't useful in this situation. The chart pictured above shows a downtrend in APPL stock.
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The downtrend is caused by sharp downward moves, followed by slower downward moves. A trend following gold trading indicator helps a gold trading trader to analyze the overall market gold trading trend, while at the same time using more than one momentum gold trading indicator gives better and more reliable entry and exit signals for trading gold. For this gold trading example the gold trading trend direction is upwards, but at some point there were a few whipsaw signals generated by the stochastic oscillator - and the question is how can a gold trading trader avoid these gold whipsaws?
MACD (Moving Average Convergence/Divergence Oscillator)
To avoid gold trading whipsaws combine two or more gold trading indicators - such as MACD - RSI - Moving Average gold trading indicator to help avoid these whipsaws, for example the MACD indicator had not given a crossover gold trading signal although MACD indicator was very close to the zero center line level. One gold trading tip is that as long as MACD indicator is above zero center line even if the MACD indicator lines are heading downwards then the gold trading trend is still upwards.
As moving averages change over time, it will be up to to decide whether they are generally converging or diverging. This strategy is similar to the trend following strategy we developed previously.
A simple day trading strategy -
This is because, ultimately, the market will reverse and resume the trend. But more importantly, it maximizes your potential profit at the same time. This strategy is included in our complete list of the best trading strategies compiled on the internet. Our team here at Trading Strategy Guides. We developed this trend following strategy to show the world how to properly use the MACD indicator. Our goal is to show how accurate this tool can be in forecasting market turning points. Our favorite day trading strategy, Day Trading Price Action- Simple Price Action Strategy , has attracted a lot of interest from the trading community.
We will show you how to use MACD effectively, what a true trend indicator looks like, and a super profit indicator. You'll also learn why we think the MACD indicator is the best trend following indicator. By the way, this is among the most popular Forex indicators.
The MACD is one of the most powerful trend following and momentum indicator. The MACD is a commonly used technical indicator. As stated, the acronym stands for Moving Average Convergence Divergence. In simple terms, a trend-following indicator helps you to determine the overall direction of the market. Whether it is up bullish divergence or down bearish divergence. On the other hand, a momentum indicator seeks to determine the speed of the trend.
Put them together and you have the perfect combination for a trend following strategy. A picture is worth a thousand words. So, here is how the classical MACD indicator looks like on a chart:. The MACD manipulates its moving averages in a rather clever way. This indicator is especially useful in forex trading strategies. It can signal changes in trend much closer to when they actually occur. Please have a look at the chart example below to see the power of the MACD indicator.
They are calculated using a formula, which adds greater weight to the most recent price movements data. Our popular Price Action Pin Bar Trading Strategy is a great introduction to what a pure price action strategy should look like. This is an unorthodox approach to technical analysis.
MACD Trading Strategy - How to Implement Indicator settings
But, we at Trading Strategy Guides. The first rule of thumb to recognize a swing high on the MACD indicator is to look at the price chart if the respective currency pair is doing a swing high the same as the MACD indicator does. A higher high is the highest swing price point on a chart and must be higher than all previous swing high points.
While a lower high happens when the swing point is lower than the previous swing high point. See below, how your chart should look like after you correctly identified the swing points on the MACD indicator and connected them through a trendline. At this point, we really ignored the MACD histogram because much of the information contained by the histogram is already showing up by the moving averages.
Meaning of “Moving Average Convergence Divergence”
Look at the price action now and compare it to our MACD trendline we drew early. We can clearly notice that the MACD contains the price action much better and reflects the trend much clear.
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However, if trading would be that easy we would all be millionaires, right?