MACD Divergence Indicator MT4 needed? When trading forex, the professional traders understand that without confirmation, there is no need to enter a position. Confirmation of trade plays a vital role in whether you are contemplating entering or exiting a trade. Ideally, traders are supposed to use price itself to determine this, but some find it difficult. However, most traders combine technical indicators with price action to get reliable confirmations.
What is Divergence?
Divergence occurs when the price of a currency pair is moving in the opposite direction from what your traditional indicator may be telling you. In other words, the price is contradicting, whatever the indicator is telling you. Traders use this as an indication that such a currency pair is weakening and may likely change direction over time. For beginners, there are positive and negative divergences.
Divergence and confirmation are not the same in forex trading. Confirmation is when multiple indicators and price is telling the same thing. However, divergence is when an indicator and the price of a currency pair are telling you different things. In other words, if the price is going up and the indicator you use is saying something else, that is divergence.
Divergence Indicators in Forex Trading
One popular indicator among analysts and traders is the moving average convergence divergence (MACD) indicator. The indicator is quite simple to use but the most misunderstood by most traders. It uses moving averages to display changes in price.
For new traders, there is always conflict as to if MACD is the best indicator to trade divergence. Well, the MACD indicator in your MT4 doesn’t use a formula, which is why it is hard to use it in trading divergence. However, to trade divergence properly, you need a traditional MACD oscillator.
Typically, MACD divergence occurs when the MACD indicator and the price are in the opposite direction. Well, this isn’t about the signal line and the MACD line. For instance, MACD divergence is when the price of a currency is making lower lows, whereas the MACD line or histogram is making double bottoms or higher lows. Remember, for a divergence to occur, one of the following must happen:
- Double bottom
- Double top
- Lower low than the previous low
- Higher high than previous high
The MACD indicator indicates the correlation between the prices of two moving averages. It uses the 26, 12, and 9-day exponential moving averages to display relevant information on the chart. It is calculated by subtracting the short term exponential moving average from the long term moving average. Interestingly, traders interpret the MACD indicator in three different ways.
Traders use the crossover to enter a short trade when using the MACD. Whenever the MACD histogram falls below the main signal line, it signifies that the currency is on a bearish move. This triggers traders to go short on such particular currency pending when it changes. Alternatively, when the MACD histogram moves above the mainline, then it indicates a bullish signal. In this case, traders may find the best option to go long.
Center Line Crossover
Another way traders take advantage of the MACD is by using the centerline crossover. The idea is that whenever the MACD crosses the zero line and moves from positive to negative, it indicates a buy signal. Alternatively, when it crosses the zero line before moving from negative to positive, then it indicates a sell signal.
Here is where the MACD divergence indicator MT4 comes into play. You can use it when the pair deviates from the MACD. Once this happens, you can say the current trend is coming to an end. This occurs typically whenever the price of a currency pair moves in the opposite direction with the MACD indicator.
Divergence Patterns in Forex Trading
If you think divergence is something you want to include in your strategy, it is essential to know that there are four different types of divergence patterns. They are divided into two categories – regular and hidden divergence.
The regular divergence comprises of the bearish and bullish divergence. A bullish divergence occurs when the price creates two higher tops on a chart, whereas your indicator indicates two lower tops. Whenever you stop a bearish divergence, the price takes a robust bearish movement typically. This can take place irrespective of the previous bullish condition of the market.
A bullish divergence is the opposite of the bearish divergence in the sense the indicators indicate higher bottoms, whereas the price makes lower bottoms. Price usually increases after a bullish divergence takes place.
The other category of divergence is the hidden divergence. This comprises of the hidden bullish and hidden bearish divergence. A hidden bullish divergence occurs when the indicators show lower bottoms, whereas price indicates higher bottoms. However, the hidden bearish divergence is when the indicators signify higher tops, whereas price shows lower tops.
Divergence trading is an effective way of making a profit in the market, which is why many traders rely on MACD divergence indicator MT4. The reason is that divergence formation serves as a leading signal to enter or exit a trade. Another way to put it is that a divergence pattern is bound to take place before the price move. Through this, traders can anticipate the direction of the market and enter a trade
Conclusion MACD Divergence Indicator MT4
Using MACD divergence indicator MT4 to trade divergence can be profitable, especially when done rightly. It can be the cutting edge you need to stay ahead of the market. The MACD indicator can help alert you of trend reversals even before they happen since it is a leading indicator.
However, using the MACD divergence indicator doesn’t mean that you will always be ahead of the market. It doesn’t work correctly in a ranging market and will often generate false signals. It is time to trade MACD divergence the right way by using the right indicator. Most traders mistakenly think they can master the MACD divergence indicator MT4 overnight without doing any backtesting. Importantly, you should backtest the indicator and only use it when convinced of the outcome.
We have other options you can combine or use standalone to further boost your chances of an increase in profits and your winning probability in the forex market, so check it out through this link.