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.
When divergence between the price action and the indicator develops, it means a potential trend reversal in the market. MACD is a very versatile technical indicator that can be used to trade these divergence patterns.
A bullish divergence happens when the price action makes a new low while the MACD Histogram makes higher bottom. This is an indication that the bears are getting weaker and losing control of the market.
Enter into a long trade when the MACD Histogram ticks up from its later higher bottom and the price is at a new low. Place the stop loss at the latest low in the price action. If the price action continues to fall tripping the stop, look out for the Triple Bullish Divergence.
Triple Bullish Divergence is a very strong signal. A Triple Bullish Divergence happens when price action makes three consecutive lows while the MACH Histogram makes three higher lows. To trade this enter into a long trade when the MACD Histogram ticks up from its third and highest bottom while the price action is at its new low. Place the stop loss at the latest low in the price action.
A strong bearish divergence develops when the price action makes a new high while the MACD Histogram makes a lower high. This indicates that the bulls are losing control and getting weaker.
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.
Triple Bearish Divergence is identified by three price peaks and three MACD Histogram higher lows. Go short when the MACD Histogram ticks down from its third higher low with the prices are at a new high. Place the stop loss at the most recent highest high in the price action.
However, when you combine the above divergence patterns with candlestick patterns, you get a pretty strong and powerful combination. Candlestick patterns and these divergence patterns tend to confirm each other.
Related Reading
- How To Trade With The MACD Histogram
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