Learn MACD Divergence Analysis On Charts

MACD Divergence Analysis:

Learn MACD Divergence Tactics:

Most beginners have difficulty learning the MACD because it's made up of several parts that interact with one another. The MACD indicator is a very powerful indicator and can be used in several ways in your trading. This can be used as single indicator as well as supporting indicator for analyzing charts of stocks and commodities for trading. Once you understand how the MACD line is calculated and understand what each of the three parts of the indicator calculate the indicator becomes very simple to understand and moreover to utilize but here we will discuss only divergence in MACD and how to analyze it.


MACD Divergence Analysis:

The divergence method is by far the easiest way to use the MACD indicator and one I suggest you start with. The concept of divergence is based on overbought and oversold price levels. Divergence is basically a short term momentum technique to determine when markets are running out of steam temporarily. This method of analysis relies on visual analysis of the MACD line.

Only Focus On The MACD Line For Divergence Analysis.
Only Focus On The MACD Line For Divergence Analysis (The Red Line).

Bullish Divergence:

Divergence occurs when the MACD diverges from the price of the underlying market. A bullish divergence forms when a market makes a lower low and the MACD Line forms a higher low. Since the MACD Line measures momentum, bullish divergence between the market and the MACD Line suggests that the market may be moving higher despite of the fact that prices are moving down short term.

You can see a perfect MACD chart divergence example of this chart of Nifty. Notice,at point 1, the Nifty begins a strong rally after diverging from the MACD substantially. Keep in mind that divergence analysis works best for reversal formations after markets have been trending for substantial amount of time.

Bearish Divergence:

Bearish Divergence occurs when markets are making higher highs and MACD Line is making lower lows. This pattern is the exact opposite of Bullish Divergence and works well after markets have been up trending strongly for extended periods of time. I do not suggest using divergence patterns in range bound markets. The lack of strong momentum will not produce meaningful results when using the MACD indicator. Notice in this particular example, at points 2 and 3, how Nifty diverges after a strong uptrend that lasted over 9 months and second divergence occured after one year at point 3. You always want to see strong uptrend prior to using MACD for divergence.

Remember, you only have to pay attention to the MACD line (Red line) when analyzing divergence. In this example at point 2 Nifty appears to move higher but quickly heads south for a few days after the bearish divergence signal but recovers a few days later because of strong uptrend. This set up works well with basic reversal patterns such as double tops and double bottom patterns. I tend to use the MACD as a confirmation indicator when trading these patterns.

The Stronger The Divergence The Better The Trade.

Things To Keep In Mind:

Divergence analysis is another way to utilize the MACD Indicator. Keep in mind that Divergence only works after sustained trends are coming to an end and exhibited strong momentum in one direction. Also, MACD Divergence works well as a confirmation indicator for other reversal patterns such as double tops and double bottoms. Avoid using the MACD Divergence when trading range bound patterns and when markets are just beginning to trend because the MACD not work well in those types of market environments.

Wishing you the best in your trading. Very soon more lessons will come.