Thursday, May 3, 2012

Forex MACD Divergence Strategy

November 25, 2011 by  
Filed under Forex Strategies


In today post, I shall share with you another strategy that I like to trade with and it is the forex macd divergence strategy.

From the name of this strategy, you roughly should know which indicator we are going to use here. So let me go through with you what exactly is forex macd divergence.

Explanation

When you see the price making a lower low (forming a down sloping line) while the MACD technical indicator is making a higher low (forming an up sloping line), this is a sign of a positive divergence.

When you see the formation of a positive divergence, it is usually a signal that the price is going to move up.

When you see the price making a higher high (forming an up sloping line) while the macd indicator is creating a lower high (forming a down sloping line), it is a sign of a negative divergence.

Whenever you see such a formation, it is a sign that the price is going to move down.

How to Use this strategy

This is exactly what we are going to do with this strategy, when you see the formation of either one of the above divergence, you will always enter a trade and then use the most recent high or low as your stop loss target.

For example:

If you are seeing the formation of a positive macd divergence, you will then place your stop loss at the most recent low. As for the target profit, I will usually suggest you to exit half of your position when the price has move the same amount as your stop loss.

You will then shift the remaining trade to breakeven and the target profit for this remaining position will be twice the stop loss.

However there are times where this strategy also produces losing result. In fact, there is no strategy that wins 100 percent of the time. I must say that the winning percentage of this strategy is pretty decent and with the good risk reward ratio, you will be able to make money from it.

The only problem with this strategy is the occurrence of fake out. Therefore for those of you who has got a copy of my forex trend line strategy book, you will be able to use the technique that I have taught you in the book to identify those fake out and it will in turn increase your winning percentage.

Other Related Posts:

  1. Macd Technical Indicator Explained
  2. My Forex Exit Strategy Revealed

Comments

7 Responses to “Forex MACD Divergence Strategy”
  1. John Tomlinson says:

    Kelvin, how do you get the 2 “crossing” lines on the MACD. I can only get 1 and you use 2 all the time, what have i got to put in to get the 2 lines.
    Thanks, I enjoy your tips.
    John Tomlinson

  2. Tampa says:

    Hi Kelvin
    I can see that Divergences are effective and very simple method to use. I have 3 questions:
    (1) do you think it is best to trade divergences in the direction of the daily trend? So if the daily timeframe has an uptrend, we will look for positive divergence and if the daily timeframe has a downtrend we will look for negative divergence.

    (2) do you use default setting of the MACD or modified?

    (3) when a divergence occurs, how do we know and we are sure to place a trade in the opposite direction of the divergence? Do we look for a strong bullish candle in the case of positive divergence and do we look for strong bearish candle in the case of negative divergence?

    Thanks

    • Kelvin says:

      Hi Tampa

      (1) I personally do not use the daily trend to trade the divergence, but what you have said has given me some tips for this strategy. I think that your method can help to improve the winning percentage.

      (2) Yes I am using the default setting

      (3) Once there is a formation of a divergence, you can then enter a trade. However using the candlestick can help you get better trades but there are times where you will miss out some good divergence trades if you wait for the candlestick formation.

      • Tampa says:

        Hi Kelvin
        Thanks for the response. In regards to #3 answer, sometimes when a divergence is formed, price action keeps moving down (assuming we are having positive divergence). So if we entered when the divergence formed, we would get stopped out. So I am wondering, and asking you from your experience using this method, if it is best to enter when a strong candle signal form, in this case a bullish one.

        If you enter as soon as the divergence formed, what do you do to prevent getting whipsaw?

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