Today I will reveal another way in which traders utilize MACD indicator, the method is known as divergence. This is by far the simplest way to use the MACD indicator and one It is advisable to start with. The concept of divergence will depend on overbought and oversold price quantities. Divergence is basically a short-term momentum technique to determine when markets are running out of steam temporarily. This method of analysis relies upon visual analysis of the MACD range.
Divergence occurs when the MACD diverges from the cost of the underlying market. A bullish divergence forms if a market makes a lower low along with the MACD Line forms a larger low. Since the MACD Collection measures momentum, bullish divergence between the market along with the MACD Line suggests that industry may be moving higher despite that the prices are moving down short-term. You can see a best MACD chart divergence example of the chart of Hyatt Hotel. Notice the stock begins a strong rally after diverging on the MACD substantially. Keep in mind that divergence analysis is ideal for reversal formations after markets are trending for substantial period of time.
Bearish Divergence occurs when areas are making higher highs and also MACD Line is making reduce lows. This pattern is the exact opposite of Bullish Divergence and works well after markets have been up trending strongly for extended intervals. I do not suggest making use of divergence patterns in range certain markets. The lack of strong momentum will not produce meaningful results when using the MACD indicator. Notice in this particular example how QQQ ETF diverges following a strong uptrend that lasted in excess of 4 months. You always need to see strong uptrend prior to help using MACD for divergence.
Here's one more example to get a good idea of how a MACD Chart divergence sets up. Remember, you don't have to pay attention to either the Histogram or the actual Signal Line when analyzing divergence. In this example Apple Computers appears to move higher but quickly heads south a few days after the bearish divergence signal. This set up works properly with basic reversal patterns for instance double tops and double base patterns. I always use the MACD being a confirmation indicator when trading these patterns.
In this final example you can observe how Bank Of America Stock makes a reduced low while the MACD will be strongly moving higher at this also time; notice it occurs following a strong downtrend as well. The top MACD divergence patterns occur soon after prolonged trends and momentum moving in one direction.
Divergence analysis is another way to utilize the MACD Indicator. Take into account that Divergence only works after sustained trends are going to an end and exhibited strong momentum in a single direction. Also, MACD Divergence works well as a confirmation indicator for other reversal patterns for instance double tops and double soles. Avoid using the MACD Divergence while trading range bound patterns so when markets are just beginning to trend since the MACD not work well in those forms of market environments.
Wishing you the most beneficial in your trading