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MACD Divergence: Uncovering the Best Red Flag Indicator

Hi traders!

The MACD (Moving Average Convergence Divergence) indicator is a popular and widely used technical analysis tool. It is a trend-following momentum indicator that is used to identify trend reversals and potential entry and exit points. One of the best ways to use the MACD is to detect divergence.

Trend exhaustion

Divergence occurs when the price of an asset moves in the opposite direction to an indicator, such as the MACD. This can be a strong signal that the trend is about to reverse or consolidate. MACD divergence can be bullish or bearish, depending on the direction of the divergence.

To detect divergence using the MACD, first, identify the trend by looking at the price action on a daily chart. If the trend is bullish, look for bearish divergence on the MACD. This occurs when the price is making higher highs while the MACD is making lower highs. Conversely, if the trend is bearish, look for bullish divergence on the MACD. This occurs when the price is making lower lows while the MACD is making higher lows.

False breakouts from flat levels

When the price is breaking out, but the MACD is not confirming the breakout with a matching low or high, it can signal a potential false breakout.

Also, if price has create a flat level, but the MACD is diverging, this can be a reliable indicator that price has lost steam and may not be able to breakout successfully.

Happy Trading!

Adam Harris

FXGlobe Ambassador Adam Harris is based in London, UK. He’s been trading professionally since 2013 and his specialties are technical and trend-based trading.

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Our Ambassador’s Daily Picks are not trading advice. These are informational articles covering the events which happened in the market already & scheduled events which are scheduled to happen in the Economic & Earnings Calendar.

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