Technical Analysis Secrets #3: Moving Average Convergence Divergence

  • when the price of an asset moves sideways (eg. in a range or in a pattern), because the distance between the distance between 26-period MA and the 12-period MA (which is exactly what the MACD is measuring) narrows
  • when the price of an asset is gapping higher and then accelerates upwards, which causes the MACD to jump and since the gapping can’t be sustained, a divergence occurs despite the trend only slowing down instead of reversing
  • always utilize price action (the ultimate indicator) together with divergence (a momentum indicator that’s based on price data)
  • if a divergence occurs, don’t exit your trade just because of the divergence as it does not always result in a reversal, so always look for confirmation on other indicators, trendlines etc.
  • if you’re looking to enter a trade based on a divergence, wait for the price to break the trend so that it confirms the divergence
  • expect to see divergence when the price movement slows or moves sideways, but this isn’t always a reliable signal

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