MACD Divergence Strategy

What is MACD?

The acronym MACD is from the term Moving Average Convergence / Divergence. The MACD calculated from three collections of data points which usually use the closing price of the particular time period. This gives traders and analysts an historical indicator which measures market momentum through measuring the convergence and divergence of a two EMAs or exponential moving averages. One is a fast moving EMA taken over a short period of time, the other is a slow moving average taken over a longer period of time. The MACD is an oscillator which is displayed as a combination of a continuous line and a bar graph.

How It Works

The MACD strategy uses the information displayed in the bar graph and the continuous line to anticipate movement in the underlying security. However, it should be remembered that the MACD is based on historical data and is therefore a lagging indicator. It is not predictive.

While is it possible with the MACD to get a good idea of what a particular security might be doing it is safest to team it up with one or two other indicators that you have studied. For instance you could use the MACD with Fibonacci and lines of support and resistance.

The Strengths

Because it is calculated from several factors and time frames, the MACD is a particularly dependable indicator. It is therefore a good indicator on which to base several strategies, especially when it is used with other indicators and market analyses.

The MACD is also dependable in any time chart that you may prefer using be it 15 minute, 1 hour or the daily chart. The MACD is valuable to traders no matter what strategies they use or what time frames they prefer using.

The Weaknesses

If you base a strategy on the MACD alone you will find it difficult to identify entry and exit points for your trades because there will only be one set of information, or one signal. The proponent of the strategy pushes it as being a strategy that makes trades easily identifiable and that it has the potential to generate a lot of profit. In the next breath they say that the entry and exit points can sometimes be a bit obscure.

Conclusion

The MACD strategy ahs great potential but it does need refining. You have to exercise caution if you don’t want to be lured into risky trades. It is easy to read too much into divergence or convergence if you don’t compare them with other market intelligence for a more in depth analogy.

If you wish to use the MACD system without much else, then it is a good idea to compare MACD information from several time frames, say 15 minute, 30 minute, hourly and maybe daily. If all of them are showing a convergence or divergence at the same point then this may indicate an opportunity to take a contrarian position on your preferred time frame.

As mentioned above you will be in a stronger position if you use the MACD as a base and add diagnosis from Stochastics, Fibonacci and other EMAs.