MACD Divergence – profitable strategy

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MACD Divergence – profitable strategy

MACD Divergence is the convergence and divergence of price and indicator. I believe that the divergence signal is one of the strongest entry signals. However, you need to understand in which direction you can buy and in which to sell.

Types of divergence:

  • bearish divergence – a situation in the market when the price chart goes up (shows new highs), and the MACD oscillator, on the contrary, goes down (shows new lows).
  • bullish divergence – a situation in the market when the price chart goes down (shows new lows), and the MACD oscillator, on the contrary, goes up (shows new highs).
  • multi-divergence – several divergences by a contractor in one person.

The divergence-based strategy, which I will tell you about today, will have clear entry and exit rules, a clear description of signals (determining a price pattern) for entry, and strict rules for setting stop loss and take profit (money management).

Today, consider the following topics:

  • enter the market on the first wave. How to determine the first wave.
  • enter the market on a flat
  • trade from pullback
  • How set stoploss and takeprofit correctly

To facilitate the determination of divergence on the chart, you can try my “HurtLockerPro RealDivergence EA” expert advisor. You can configure the adviser only for alerting about the occurrence of divergence on the selected chart and timeframe. This EA is a set of algorithms for determining divergence on a chart and its notification.

To determine divergence, you will need the following tools:

  • MACD indicator (standard settings: 12, 26, 9) or HurtLockerPro RealDivergence EA expert advisor for automatic divergence detection
  • Any timeframe. However, remember that stop loss and take profit will be of different lengths.
  • Moving Average 100 (SMA)
  • ZigZag (12.5.3)

Entry Rules – First Wave

  1. First you need a bullish or bearish divergence to form
  2. Analyze the movement before divergence: whether the price crossed the moving average with a period of 100 (MA100). Also, the price should rewrite the last significant high / low and price movement should move in one direction without pullback.
  3. Use the Fibonacci tool and stretch it from the beginning of the movement to the end of the price movement. In this scenario, it is best to use a pending order – BuyLimit. A pending order is placed at 61% or 50%. Stoploss is placed behind the next level.

Entry Rules – Flat

  1. First, you need a bullish or bearish divergence to form
  2. Analyze the movement before divergence: if the price movement resembles a flat (for example, this can be indicated by the frequent price intersection with moving average with a period 100). The price does not go beyond the visual channel, even if it is an inclined flat.
  3. If the flat is identified, you need to check the fundamental background: are critical news expected today. If not, divergence needs to be traded from the edges of the channel. Stoploss to put behind the channel edges.

How to determine which direction to enter

The most difficult decision is in which direction to open the order. In other words, to buy or sell, because you do not want to constantly receive stop-loss.

There are several scenarios that will form before divergence. Each scenario will give us a hint to which direction to open an order. 

Here are some most frequently occurred price patterns on the chart:

  • The price broke through a double high/double low, which formed a divergence, now this zone will be support/resistance.
  • A second divergence has formed in the zone of the first divergence (this also happens)
  • The moving averages with periods  100 and 50 have recently crossed up, the first wave has formed, in this case, you need to use BuyLimit. You can enter by market price if the fast moving averages 21 and 13 have crossed in the direction of the slow moving averages.
  • Moving averages of 100 and 50 start to round off in the opposite direction, then in this case you need to use the Sell limit

Price scenario and suitable market entry scenario:

Price scenario (pattern)Scenario for opening an order
First waveonly baylimit
Divergence after the first wave (second impulse wave)If the trend continues, usually a new divergence arises after the next impulse wave has ended. In this case, you can enter in the direction of divergence: bearish – sell, bullish – buy, with a short stop and a short take profit. In this case, the risk / reward ratio will be 1/1.
Third wave of divergenceIf the trend continues and another divergence occurs, then the MA ++ (double paired averages) signal should be taken into account: if the moving average with periods 50 and 100 show a strong trend, then you can buy – buy-limit (with bearish divergence) and buy with bullish divergence.
FlatUsually, it is easier to determine in which direction to trade in the flat, since the divergence formed in the flat is usually a false breakdown. And after a false breakdown, you can open order by market price in the direction of divergence: bearish – sell, bullish – buy
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