One of the strongest signals generated by technical indicators is MACD divergence on a daily chart. MACD stands for Moving Average Convergence/Divergence and can be quite useful for giving hints of a possible market reversal.
We calculate this indicator by generating a 12 period Exponential Moving Average and a 26 period Exponential Moving Average and plotting the difference on our chart. We then add a 9 period Exponential Moving Average of that figure and plot that as our Signal Line. We now look for two situations. Positive Divergence is when the MACD makes a higher low but the market makes a lower low.
This situation gives us a hint of a possible reversal to the upside. The other situation is Negative Divergence and is noted when the MACD makes a lower high while the market makes a higher high. This situation gives us a hint of a possible reversal to the downside.
Since I am a trend trader and only trade in the direction of the daily trend, I would not look to initiate is new buy position when noting Positive Divergence or a new sell position when noting Negative Divergence.
We calculate this indicator by generating a 12 period Exponential Moving Average and a 26 period Exponential Moving Average and plotting the difference on our chart. We then add a 9 period Exponential Moving Average of that figure and plot that as our Signal Line. We now look for two situations. Positive Divergence is when the MACD makes a higher low but the market makes a lower low.
This situation gives us a hint of a possible reversal to the upside. The other situation is Negative Divergence and is noted when the MACD makes a lower high while the market makes a higher high. This situation gives us a hint of a possible reversal to the downside.
Since I am a trend trader and only trade in the direction of the daily trend, I would not look to initiate is new buy position when noting Positive Divergence or a new sell position when noting Negative Divergence.
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