Secondly, when MACD turns up from below zero it is considered bullish. When it turns down from above zero it is considered bearish. When the MACD line crosses from below to above the signal line, the indicator is considered bullish. The further below the zero line the stronger the signal. When the MACD line crosses from above to below the signal line, the indicator is considered bearish. The further above the zero line the stronger the signal. During trading ranges the MACD will whipsaw, with the fast line crossing back and forth across the signal line.
Users of the MACD generally avoid trading in this situation or close positions to reduce volatility within the portfolio. Another potential buy and sell signal is shown in the graph above in the Nasdaq exchange-traded fund QQQQ chart. The MACD histogram is shrinking in height. This occurs because there is a change in direction or a slowdown in the stock, future, bond, or currency trend.
The MACD histogram is increasing in height either in the positive or negative direction. This occurs because the MACD is accelerating faster in the direction of the prevailing market trend. When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will increase in height. When the MACD histogram does not increase in height or begins to shrink, the market is slowing down and might be warning of a possible reversal.
If you already understand how to use the MACD index, you can explore some of our commodity guides to find a suitable asset to practice with, like precious metals , energies , and agricultural commodities. Alternatively, you can see our stock trading guide. Notice in this example how closely the tops and bottoms of the MACD histogram are to the tops of the Nasdaq e-mini future price action.
Note: In the above example, three consecutive days of the shrinking MACD histogram from top or bottom served as possible buy or sell signals, these are shown with arrows. This is an aggressive example. In addition to signaling, potential buy or sell signals, the moving average convergence divergence could be used for warnings of potential change in the direction of stocks, futures, and currency pairs. Divergences might signal a trader to get out of a long or short position before profits erode.
Bearish divergence occurs when a technical analysis indicator is suggesting that a price should be going down but the price of the stock, future, or currency pair is continuing to maintain its current uptrend.
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Detailed instructions can be found below. To be a profitable trader you need to master discipline, emotions, and psychology. It is crucial to know when to trade, but also when not to trade. Now go to the left side of your MT4 terminal.
In the Navigator find the gauge name, right-click it and select Attach to the chart. A good forex indicator will most probably enhance your chance of success. Nonetheless, remember about having realistic expectations. Thus, this forex indicator provides false signals occasionally. Its performance will vary significantly depending on market conditions. Along with the divergence, the indicator also allows traders to determine the buying and selling signals with the help of arrows.
These powerful features make it suitable for both new traders and experts. Beginners can use this indicator to learn where the divergence forms and how to open or close positions in such situations. At the same time, expert traders can use it to confirm their anticipated movements. It does not use any complex charts or graphs to make it complicated to understand. Instead, it uses solid lines to indicate regular divergence and dotted lines to indicate reverse divergence.
But before using the indicator, traders must realize what regular and reverse divergence are. The bullish and bearish divergences are further classified into regular and reverse divergence. When the Forex price or any security reaches a lower low but the indicator suggests a higher low, it is known as the regular bullish divergence.
On the contrary, if the price reaches a higher low but the indicator is making a lower low, reverse divergence is the case. In the case of bearish signals, the situation is reversed. As mentioned above, the Divergence Indicator for MT4 uses solid and dotted lines to highlight the divergences on the price chart.
