Trading The MACD Divergence

Moving average convergence divergence (MACD), invented in 1979 by Gerald Appel, is one of the most popular technical indicators in trading. MACD is appreciated by traders the world over for its simplicity and flexibility because it can be used either as a trend or momentum indicator.

Trading divergence is a popular way to use MACD histogram (which we explain below), but, unfortunately, the divergence trade is not very accurate - it fails more than it succeeds. To explore what may be a more logical method of trading MACD divergence, we look at using the MACD histogram for both trade-entry and trade-exit signals (instead of only entry), and how currency traders are uniquely positioned to take advantage of such a strategy.

MACD: An Overview
The concept behind MACD is fairly straightforward. Essentially it calculates the difference between an instrument's 26-day and 12-day exponential moving average (EMA). Of the two moving averages that make up MACD, the 12-day EMA is obviously the faster and the 26-day is the slower. In the calculation of their value, both moving averages use the closing prices of whatever period is measured. On the MACD chart, a 9-day EMA of MACD itself is plotted as well, and it acts as a trigger for buy and sell decisions. MACD generates a bullish signal when it moves above its own 9-day EMA, and it sends a sell sign when it moves below its 9-day EMA.