Divergences are considered to be pretty strong trend reversal signals. Divergence happens when the price action and the indicator in this case the histogram moves in the opposite directions. For example, the price action makes a new high while the indicator makes a new low or the price action makes a new low while the indicator makes a new high.
This divergence pattern is an important signal on the potential turning in the trend. You can use a number of indicators in trading these divergence patterns that includes the RSI, CCI, Stochastics and MACD. Moving Average Convergence Divergence is a simple yet powerful oscillator that is widely used by pro traders in their trading decisions. You can use the MACD Histogram in trading divergence patterns. Let’s see how!
Divergence patterns can be bullish or bearish. A bullish divergence pattern develops when the price makes a new low but the indicator in this case the MACD Histogram makes a higher low. When this pattern develops, it means the bears are losing control and getting weaker or in simple terms selling is decreasing in the market while buying is increasing indicating prices will start rising soon.
When you spot a bullish divergence pattern, get ready for a long trade by going long at the MACD Histogram up tick just after its latest higher low with the price making a new low. You should place the stop loss at the most recent low formed.
Triple Bullish Divergence pattern develops when the prices make three consecutive new lows while the indicator in this case the MACD Histogram makes three consecutive higher lows. When this happens, you can enter into a long trade when the MACD Histogram ticks up from its third highest low with the price action at its new low by placing the stop loss at the most recent low.
Just like a bullish divergence, a bearish divergence indicates the potential start of a new downtrend after an uptrend. A bearish divergence pattern is formed when prices makes a new high while the indicator makes a new lower high. This indicates that the bulls are getting weak in the market.
Enter into a short trade when the MACD Histogram ticks down after the second top and price is at a new high. Place the stop loss at the latest high in the price action. If you get stopped out, look for the Triple Bearish Divergence.
But sometimes, prices continue to rise. In this case look for the Triple Bearish Divergence that is formed when price action forms three peaks while the MACD Histogram forms three higher lows. When you spot a triple bearish divergence pattern, enter into a short trade on the first tick down on the MACD Histogram after the third higher bottom formed. You should place the stop loss at the most recent high formed on the price action.
When you combine candlestick patterns with these divergence patterns, you get pretty strong confirmation of the trading signals. Get this highly profitable Magic Breakout Forex Strategy by Tim Trush and Julie Lavrin FREE. Get these Correlation Trading Cheatsheets FREE. Discover this Super Divergence Blueprint that works for forex, stocks, futures and options on all timeframes and can help you spot high probability hidden trades!