How to Trade MACD Divergence with the MACD Indicator for Forex Success

Divergence is one of the key strategies for entering long positions in the Forex and Crypto markets. This method is popular due to its simplicity, high profitability, and high win rate. In this article, we will learn how to easily identify divergences on the chart using the MACD indicator and how to trade them. Understanding this concept helps you avoid entering wrong positions and better recognize when the market is about to change its trend.

Indicators generally move in sync with price action. When the price is rising, the MACD indicator confirms the uptrend by showing longer green histograms that form higher highs, indicating increasing strength and momentum. Conversely, when the price is falling and making lower lows, the MACD confirms the downtrend as the red histograms lengthen and create lower lows.

How to identify divergences with MACD

To identify divergence, you first need to draw a trendline on the price chart and check whether the price forms lower lows or not. Then, move to the red histograms in the MACD indicator and draw a trendline for them as well. If the price has formed lower lows on the chart, but the red MACD histograms have formed higher lows or equal lows, this indicates a divergence.

For example, when the price is in a downtrend and forms lower lows, but the red MACD histograms form higher lows or equal lows, which shows a decrease in sellers’ strength, it can be said that divergence has occurred. Then, after bullish confirmations and a price reversal, you can enter a buy position. Keep in mind that this strategy is mainly suitable for long (buy) positions.

Consider the following example

Photo by TradingView

In the photo above, we have identified divergence on the chart using the MACD indicator. On this chart, the price has made lower lows, but on our indicator, the red histograms have become shorter and weaker and have formed higher lows. At this moment, the movement of the price and the indicator are different, and divergence has occurred on the chart.

Note that after the divergence, the price started to rise and the market entered an uptrend. Buyers have entered the market and taken control, and a very suitable trading position for a buy has been created. You can enter this trading position and benefit from the upward trend.

We hope you enjoyed this article.