We calculate this indicator by generating a 12 period Exponential Moving
Average and a 26 period Exponential Moving Average and plotting the difference
on our chart. We then add a 9 period Exponential Moving Average of that
figure and plot that as our Signal Line. We now look for two situations.
Positive Divergence is when the MACD makes a higher low but the market makes a
lower low. This situation gives us a hint of a possible reversal to the
upside. The other situation is Negative Divergence and is noted when the
MACD makes a lower high while the market makes a higher high. This
situation gives us a hint of a possible reversal to the
Since I am a trend trader and only trade in the direction of the daily trend,
I would not look to initiate is new buy position when noting Positive Divergence
or a new sell position when noting Negative Divergence. However, if I were
already in a trade and the MACD showed a possible reversal, I would tighten up
my protective stop by moving it closer to the current market price to protect
any profits that I may have in the trade at that time. As with any
technical indicator, the best signals will come on the daily chart and as the
time frame shortens, the reliability of the signal weakens.
Written by Thomas Long, FX Power Course Instructor
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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