MACD divergence is a phenomenon in market technical analysis, it usually occurs when the difference between the MACD lines and the signal creates peaks or troughs that are inconsistent with the price of the asset. MACD divergence is considered by many investors to be a signal that the market will reverse. However, is using the MACD indicator in Forex effective? This article Forex Trading will provide some information and suggestions when used in Forex investment.
What are the indicators of MACD divergence?
The MACD line has 3 parameters: MACD (12, 26, close, 9) and the meaning of each parameter is as follows:
- 12, 26, 9 are the periods of the EMA (Exponential Moving Average). So what is Moving Average? It is a popular tool in technical analysis. Specifically, in this case EMA (12) and EMA (26) are moving averages calculated to the powers of 12 days and 26 days.
- EMA (9) is the signal line of MACD.
- Close: This is the market closing price (candle closing price) used to calculate the EMA.
To understand better, we can use the following formulas:
- MACD Histogram Line = MACD Line – EMA(9)
- Main MACD line = EMA (12) – EMA (26)
Buy signal: When on the chart, the MACD line from below crosses the EMA line (9). At the same time, MACD Histogram changes from negative to positive. When this happens, there is a tendency for prices to increase so investors should buy.
Sell signal: MACD line when on the chart goes from above to EMA line (9. At the same time, MACD Histogram changes from positive to negative. When this happens, there is a downward price trend. So, investors can consider selling.
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What is the role of MACD ?
MACD line, created by professional investment advisor Gerald Appel in 1979. It has become a popular tool in forex trading. And below are some important roles of this indicator.
MACD divergence helps traders determine price trends
MACD divergence helps investors identify and forecast price trends effectively. This allows investors to receive buy or sell signals to get ahead of the trend and achieve high profits.
Assessing market trends through the MACD indicator What is it ?
Evaluating market trends is an important part of using the MACD line. The line MACD divergence combines with the signal line (Signal) and the Histogram chart to confirm the weakness in the current trend. Or it indicates the rise or fall of a new trend that is about to happen.
MACD divergence helps provide signals
Similarly, investors can recognize trend reversal signals based on the method and meaning of the MACD indicator. This gives them information to make a buying or selling decision. Based on the movement of the MACD line, Zero line, and Signal Line along with the Histogram chart, traders can recognize potential opportunities to execute buy or sell orders.
Grasp price movements by analyzing the MACD indicator
The MACD line helps investors forecast and grasp price movements. By analyzing its divergence or convergence. When the MACD signal line goes up, this is a signal that the price is trending up, and vice versa.
However, sometimes there are special cases when the MACD line converges or diverges with the price, which confirms the trend. Investors can consider making a buy order. Or sell order if you want to catch the trend and increase profits.
What types of MACD indicators are there?
MACD divergence has two types corresponding to two price trends: up and down. Specifically, those two types of indicators are as follows:
MACD divergence signals a downward price trend
MACD divergence signals a downward price trend that occurs when the market is in an uptrend. In this case, the price continuously increases and its peak is higher than the previous one. But at the same time, the following MACD is lower than the previous MACD. This leads to a decrease in the value of the Histogram and the Histogram line goes down past the zero line. The contradiction shows that the uptrend strength is weakening.
However, it should be noted that MACD divergence only occurs when the MACD line crosses the Signal line. If MACD moves down but has not crossed the Signal line, there is only a sign of divergence. However, it may happen that the MACD indicator changes direction. It does not cut the Signal line due to some other reasons. In this case, no divergence occurs. Investors should pay attention to this point to avoid making wrong decisions.
MACD indicator signals an upward price trend
MACD divergence signals an upward price trend that occurs when the market is in a downtrend. The price continuously decreases and the new bottom is lower than the previous bottom. But at the same time, the following MACD is higher than the previous MACD. This leads to an increase in the value of the Histogram and the Histogram line rises above the zero line. This shows that the strength of the downward price trend is weakening and the market is showing signs of increasing again.
MACD divergence signals an uptrend that will be clear when MACD crosses the Signal line. If MACD only moves up without cutting, there is no guarantee of divergence signaling an uptrend. Investors need to be careful and observe more closely. Or you can combine it with other indicators such as support, resistance, or Price Action to accurately evaluate the trend.
Is the forecast of MACD divergence reliable?
MACD divergence forecast signals are often controversial regarding their effectiveness. Many investors use MACD divergence to find investment opportunities. However, practice has proven that this signal is not highly accurate. It often even leads to wrong forecasts, causing inaccurate decisions.
Cases when there are clear signs of divergence in the MACD, but the candlestick pattern does not show any signs of a reversal. In this situation, entering a buy or sell order carries a high level of risk. Because there is no change in price direction.
MACD divergence often occurs after the market goes through a period of strong volatility. Because there cannot be a continuous increase or decrease forever in the market. Investors often place hope on this signal for the market to reverse. However, it is possible that the market is just experiencing a slowdown. There will be a short break before resuming the current trend.
In general, depending on each case, this indicator will bring different results. Besides, to be able to predict market reversals better, you should use the RSI indicator. Combined MACD RSI together, they can provide powerful information about market trends and strength, helping you make smarter trading decisions.
See more: Exness – Trade With The World’s Leading Broker Exness
What are some notes when using the MACD indicator?
MACD divergence is general and potentially misleading. It is advised not to use this signal to invest in the opposite direction. Because this divergent signal can cause very large interference. Many situations have shown clear divergence signals but did not result in a reversal.
In addition, MACD divergence also often occurs when the market moves sideways. This is easy to understand because the MACD signal is an indicator of price trend dynamics. Therefore, when the price moves sideways, this signal appears but is ineffective. During this period, the downtrend momentum causes the MACD line to approach the zero line. It makes investors think that there is a divergence.
A sideways market will lead to repeated bullish and bearish divergences. But it had no real reversal or breakout. Investors who enter orders at this time will be stuck in a sideways trend. They will not know when a price increase will occur, leading to wrong decisions.
Epilogue
To use MACD divergence effectively, Forex Trading advises investors to be careful and patient. Combine many different indicators to have full information for up and down signals. It will help investors make accurate decisions to enter or exit the market, ensuring profits and reducing risks. Please look out for upcoming articles on our website to gain more trading experience!
Frequently asked questions
What is MACD?
MACD is a technical indicator used in market analysis. This indicator helps to visually determine the strength, weakness and trend of bullish or bearish price changes through analyzing the convergence and divergence of moving averages.
What is the easiest way to recognize MACD divergence?
You can recognize the MACD indicator by observing the discrepancy between the peaks or troughs of the price chart and the peaks or troughs of the MACD histogram.
Why is the MACD indicator important in technical analysis?
MACD is important because it can give an indication of changes in market momentum. This helps traders predict potential reversal points.
