Created in 1970’s by Gerald Appel, MACD divergence is a remarkable invention that assists in indicating the macd indicator marketing trends in the Forex trade with great accuracy. This great technical analytical indicator is employed for predicting changes in momentum, direction and strength of a particular marketing trend. By accurately predicting the upcoming changes, MACD divergence assists many traders to successfully avoid risks and make wise decisions, which would have been otherwise impossible to make.
It works on the principle of plotting the differences between two EMA’s or exponential moving averages of a particular closing price. The divergence of the difference of the two prices and the moving average are plotted as a histogram for the easy understanding of the Forex trader. EMA tells the trader about the most recent changes that took place in the stock’s rate. The MACD line tells about the trend shifts in the stock. A quick comparison of both the quantities is used to predict the possible subtle trend shift which lets the trader make decision accordingly.
The basic component of the graph includes a blue line, a red line and a chart which is either a histogram or a bar chart. The blue line is the line that shows the difference between EMA’s of 12th day and 26th day. The red line shows the difference of the 9 days. The graph shows the difference between the other two lines.
The graph is interpreted by careful analysis of the histogram. The divergence that is plotted on the graph is of two type namely positive divergence and negative divergence. Positive divergence means that the downtrend is about to end while the negative divergence suggests that the promising rates will not last much longer. The decision based on MACD divergence is valid only when taken within a limited time frame. Moreover, it is the trader’s choice whether he wants to assess the weekly graphs before making a final decision or he is ready to trust the daily charts for his decision.
As it happens with other indicators, MACD divergence can show false results as well. These can result in tremendous losses unless the trader is intellectual enough to rely on his good judgment along with the analysis of the MACD indicator. The use of MACD divergence for making decisions has increased significantly over the past few years as they have proven to be quite accurate in predicting market trends. Their high level of proficiency has assisted many traders in making the best decisions of their lives which have rewarded them highly.