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7-21 MACD Divergence Forex Trading Strategy

Traders are always looking for a trading setup that allows them to get as many pips as possible. Because of this, traders will always try to trade at the start of a new trend or momentum and try to exit when the trend is about to end. This type of trade is common in trend reversal setups. Trend reversals offer traders the opportunity to make big profits because trades are usually opened just before the trend begins and close at the end of the trend. However, trend reversals are very difficult to predict. Many traders equate it with “catching a falling knife”.

Trading shouldn't just be about taking high-yielding trades. Instead, it should be a mix of a good risk-reward ratio and a high chance of winning. There are traders who aim to anticipate the next price swing rather than a trend reversal. Although it is not easy to predict price movements, there are several ways traders can anticipate future price movements with a relatively high level of confidence.

One of the most effective ways for traders to anticipate price swings and reversals is to watch for divergences.

Divergence is the difference in the intensity of the fluctuation between the price action and the oscillator. This means that the high or low of the price swing high or low in price action is different from the high or low of the oscillator. This scenario indicates that there is a high probability that the market will reverse direction. The graph below shows us what the deviation looks like.

7-21 MACD Divergence Forex Trading Strategy - Divergence Cheat Sheet
MACD 2 line

The 2-line MACD is a momentum indicator based on the moving averages of convergence and divergence (MACD).

MACD is an oscillator based on moving average convergence and divergence. This is achieved by finding the difference between two moving average lines. The result is then displayed as an oscillator in a separate window. This line is called the MACD line. Then the signal line is lowered from the main MACD line. The signal line is basically the moving average of the MACD line.

Deviations can be identified based on whether the two lines are positive or negative. The positive line indicates a bullish bias, while the negative line indicates a bearish bias.

A trend reversal can be identified by crossing the MACD line and the signal line. A bullish reversal can occur when the MACD line crosses the signal line. Conversely, if the MACD line crosses below the signal line, a bearish reversal may occur.

The 2-line MACD indicator is a modified version of the MACD that tries to reduce the lag that exists in the classic MACD line.

EMA crossover signal

One way traders anticipate trend or momentum reversals is to look at moving average crossovers. Traders would expect a bullish reversal when the faster moving average line crosses the slower moving average line. Traders would also expect a bearish reversal when the faster moving average crosses below the slower moving average.

Effective moving average displacement. However, most of the moving average crossover signals lag behind.

The EMA crossover signal tries to reduce the lag by using the underlying exponential moving average (EMA) as the basis for the signal. This is because EMAs tend to have less lag and are more responsive to price changes.

The EMA Crossover Signal Indicator conveniently displays arrows indicating the direction of the reversal whenever it detects it.

trading strategy

7-21 MACD Divergence Forex Trading Strategy is a divergence trading strategy that aims to trade on swing points based on the 2 line MACD oscillator.

First, we should pay attention to the divergence that will appear between the swing points in the price action and the highs and lows in the 2-line MACD indicator. These can be ordinary or hidden deviations.

Once the divergence is confirmed, we should then wait for the EMA Crossover Signal indicator to draw an arrow signaling a reversal.

The confluence of the divergence and the signal of the EMA Crossover Signal indicator will confirm a valid trade setup.