Personally, I love the MACD indicator because of its reliability and its ability to work well with other indicators to form a trading strategy. In my previous posts, I have gone through how you can make use of forex MACD indicator in your trading and how you can trade MACD crossover for profit.
In this post, I will go through how I actually trade with MACD divergence and how you can make use of it to form a trading strategy for yourself. If you are not sure about what divergence is, you can look at my previous post “Forex MACD Indicator Explained” and I will now go through the steps on how you can profit from the divergence.
The MACD divergence is a very powerful phenomenon that you can trade with. However you need to understand that the divergence works well only when there is a trend as MACD divergence is an indication of a upcoming reversal.
Here are how I trade the divergence myself:
Step 1: You have to make sure that there is a trend in action for the currency pairs you are trading. The best way to identify a trend is to use several moving averages. First, you plot a 20 EMA, 50 EMA and a 100 EMA moving average and see if they are stacked nicely in a nice manner. If they are stacked nicely with good angle and separation, it is a good indication of a trending market and if the EMAs are flat and mixed, there is no trend in the market.
Step 2: Observe the MACD and the price to look for divergence.
Step 3: Look for good reversal candle patterns like railway track, hammer and hanging man.
Step 4: Draw a trend line and wait for breakout.
Some of you may think that how can it be so simple? In fact, the most profitable forex trading strategy is one that is simple and not sophisticated.
Note to Readers
Do note that the above strategy is a general strategy that has not been fine tuned. In order for you to trade with it, please fine it tune on a demo account. If you do not know how to fine tune a strategy, please read the below