MACD Divergence Forex Trading System For MT4
Please note: This strategy was publicly published in the trading community and is free to use. We do NOT make an attempt to decide if this strategy is profitable or not, because we know that the major factors regarding trading results are the skills/experience of the trader who executes the strategy. Therefore, we are mainly explaining the components and rules of the strategy. If applicable, we are highlighting advantages, disadvantages and possible improvements of the strategy.
The MACD Divergence Forex Trading System For MT4 is a straightforward strategy for trading the Forex market. Its only component is the Moving Average Convergence Divergence (MACD) and utilizes one of its diverse functions: spotting divergence. The system does not employ a custom indicator to detect a divergence automatically. Therefore, what is needed is the skill of a trader to manually spot a deviation from the price and indicator movement.
This article offers a comprehensive guide for understanding what the MACD indicator is and how it works. It also provides a thorough explanation of indicator divergence with the MACD and presents examples of this system's trade setups.
What is MACD?
The Moving Average Divergence indicator was created by Gerald Appel in the late 1970s. But despite having existed for so very long, many traders find the MACD relevant even to today's market.
The MACD is a versatile indicator capable of gauging trend strength, identifying momentum changes, or alerting trading opportunities. But for the most part, it is defined as a trend-following indicator. It is also classified sometimes as an "oscillator" and is, in fact, categorized as one on the MT4 platform.
MACD formula
Now, before moving forward, it is first important to understand how the MACD is calculated to be able to appreciate what it can do as an analysis tool. On its indicator window, traders will find a continuously moving line and a histogram bar.
Now, these, of course, represent the components of this indicator. Essentially, the MACD is based on a pair of Exponential Moving Averages (EMA) plus a Simple Moving Average (SMA) -- but sometimes, a third EMA is employed instead of the SMA.
The usual periods of these moving averages are the 12-period EMA, 26-period EMA, and a 9-period SMA.
Then, it follows this formula:
MACD = 12-period EMA − 26-period EMA
And the 9-period SMA or EMA is applied to the difference of the 12-period and 26-period. These differences in the periods used for the calculation are believed to capture changes in the direction of the asset's price.
As soon as the trend shows signs that it is weakening, the way the MACD is calculated makes it equipped to track this shift. On the other hand, the divergence, which is what the system is hinged on, is the subtle shifts in the indicator's movement that is not conforming with the movement of the price.
Such changes are utilized as a predictive tool to portend a possible end to an existing trend.
How do you read the MACD?
The difference between the 12-period EMA and 26-period EMA is plotted using a continuously moving line, called the MACD line. Then, the 9-day EMA of the two EMAs' difference, which is also called the "signal line," is also laid over on the same indicator sub-window.
And the histogram bars represent the difference between the signal line and the MACD line. This provides a more visual representation of the relationship between the EMA components of the MACD.
The histogram bar that is green in color or one that rises from the graph's midline happens when the difference between the MACD line and the signal line is positive. This is also represented by the MACD line crossing above the signal line.
On the other hand, when the difference is negative, a red histogram bar appears, equivalent to the MACD line crossing below the signal line.
An "oscillator"
As mentioned, the MACD is described as an oscillator because of its tendency to move above and below the graph's midline intermittently or the point where the MACD line and the signal line are perfectly situated in the same spot.
The bullish momentum is said to be positioned to the upside when there is a green histogram bar and bearish where it is red.
Divergence
Now, both lines on the MACD graph are often traced with a trendline to compare its peaks and troughs from that of the price. The idea behind this is that the subtle differences between the indicator's movement and the price can lead to a change in the trend's direction.
Bullish Divergence
This is a type of divergence wherein the connected peaks and troughs of the indicator move higher while the asset's price heads lower. Traders look at this as an indication that bullish trading is perhaps underway.
Bearish Divergence
On the flip side, a bearish divergence occurs when the assets' price turns higher, but the indicator makes a move lower. A bearish divergence is interpreted as a possible selling pressure that could be imminent.
The MACD Divergence Forex Trading System For MT4
The entire system is based on spotting a bullish or bearish divergence and placing a trade that coincides with the price's potential direction. What traders of this system need to do is insert the MACD indicator on the chart and carefully use a trendline to connect the price and the indicator's peaks and troughs.
The key areas to look for divergence are an apparent trend on an intraday chart like the 1-hour timeframe. Once a divergence is present, a trade can be placed accordingly.
The need for other indicators
One thing to note about this system is that while it could work independently, there is an increased risk of false signals. It can sometimes improve the probability of success by adding one or two analysis tools to aid the MACD divergence, like an extra oscillator or a price action-based indicator.
But what is demonstrated here is this system's capacity not necessarily to stand on its own but provide a way to estimate the next move of the market.
Buy Setup - The MACD Divergence Forex Trading System For MT4
A buy setup can present itself after a bullish divergence. When this happens, the trader should be alerted that a likely shift in the predominant trend is possibly close at hand. A buy trade can be placed in anticipation of this, but it would be best to use another indicator to time the entry. Even a break in an established support or resistance level is helpful.
Example 1:
The example below is a MACD bullish divergence on the EURUSD 1-hour chart. As the price turned lower from Oct. 29 to Nov. 2, the MACD lines can be traced to have moved higher.
The downtrend at this point looked in danger of trading higher, and indeed it did. However, if no other technical studies are applied, it would seem like a guessing game to figure out where to place the buy order. But with the help of the downward sloping trendline, a falling wedge pattern appeared, which is also an indication of the price reversing to the upside.
When the price broke above the falling wedge, that could be an opportune time to enter the market.
Sell Setup - The MACD Divergence Forex Trading System For MT4
For a sell trade, the MACD should offer a bearish divergence, i.e., the MACD should drift lower while the price makes a higher low. Again, to time the entry, other technical tools would be useful.
Example 2:
In the example below, the 1-hour USDCAD chart was in a visible uptrend since Jan. 21. The indicator sub-window for the MACD, though, clearly made a lower peak, thereby exhibiting a bearish divergence.
And in finding an optimal entry, the Stochastic (21, 3, 3) and an upward trendline were utilized. The Stochastic was already at the overbought area (>80) for an extended period, and when the price touched the upward trendline, the Stochastic crossed below 80.
Eventually, when the price broke below the trendline, it marked an excellent entry to short the currency pair. Although the profit from selling the USDCAD was not substantial, it still proved that the bearish divergence forecasted the slight downturn for the price.
We suggest to trade a new trading system on a demo account for at least a few weeks. This will help you to learn the system without risk of losing money. Later you can switch to a real money account.
Download the complete system description and the files here:
Partially Automated Trading Besides Your Day Job
Alerts In Real-Time When Divergences Occur
