Introduction to the MACD Divergence Indicator
Divergences are basically differences on the height or depth of a peak or dip of an oscillator when compared to price action. These disagreements between price action and its corresponding oscillator tend to eventually lead to a strong reversal. However, some oscillators tend to be more suitable for identifying divergence setups than others. The MACD is one of the oscillators that tend to work well as a basis for a divergence.
What is the MACD Divergence Indicator?
The MACD Divergence indicator is a modified version of the classic MACD indicator, which means Moving Average Convergence and Divergence. It has been modified to identify divergences based on the MACD oscillator and plot lines and arrows to indicate the divergence and its indicated direction.
How the MACD Divergence Indicator Works?
The MACD line is computed by subtracting a slower Exponential Moving Average (EMA) line from a faster EMA line. The difference is then plotted as an oscillating line on a separate indicator window. A signal line is then derived from the MACD line, which is a Simple Moving Average (SMA) of the MACD line. The signal line is then overlaid on the indicator window to pair with MACD line.
The MACD Divergence indicator then compares the peaks and dips of the MACD line with the peaks and dips on price action. It then identifies divergences based on this comparison.
This indicator plots a line above price action indicating a bearish divergence, and a line below price action indicating a bullish divergence. It also plots arrows on the MACD line indicating the direction of the divergence signal.
How to use the MACD Divergence Indicator for MT5
This indicator has a set of basic MACD settings, which are the Fast EMA, Slow EMA, and Signal SMA. These variables are the number of bars used to compute for the underlying moving average lines.
It also has some indicator settings which allow for visual modifications. It allows traders to toggle price trend lines, as well as indicator trend lines on or off. It also allows traders to toggle alerts on or off on the “Display Alert” option.
The divergences identified by this indicator can be used as a reversal trade signal. However, these signals are best used in confluence with a long-term trend or other reversal trade setups.
Buy Trade Setup
When to Enter?
Open a buy order on a confluence of a bullish reversal price action and a bullish divergence identified by the MACD Divergence indicator. Set the stop loss on the support below the entry candle.
When to Exit?
Set the take profit on the next resistance level.
Sell Trade Setup
When to Enter?
Open a sell order on a confluence of a bearish reversal price action and a bearish divergence identified by the MACD Divergence indicator. Set the stop loss on the resistance above the entry candle.
When to Exit?
Set the take profit on the next support level.
Conclusion
Many seasoned traders use divergences between the MACD and price action as a basis for their reversal setups. Some would even trade MACD divergences exclusively. However, most new traders tend to second guess themselves when trying to identify MACD divergences. The MACD Divergence indicator is a tool that can help new traders identify trading opportunities based on MACD divergences.
Recommended MT5 Brokers
XM Broker
- Free $50 To Start Trading Instantly! (Withdraw-able Profit)
- Deposit Bonus up to $5,000
- Unlimited Loyalty Program
- Award Winning Forex Broker
- Additional Exclusive Bonuses Throughout The Year
- Exclusive 50% Cash Rebates for all Trades!
Already an XM client but missing out on cashback? Open New Real Account and Enter this Partner Code: 𝟕𝐖𝟑𝐉𝐐
(Free MT5 Indicators Download)
Enter Your Email Address below, download link will be sent to you.