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标题: [技术分析] Trading The MACD Divergence [打印本页]

作者: Brainteaser 时间: 2009-12-31 07:13 标题: Trading The MACD Divergence

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

Trading divergenceis a popular way to use MACD histogram (which we explain below), but,unfortunately, the divergence trade is not very accurate - it failsmore than it succeeds. To explore what may be a more logical method oftrading MACD divergence, we look at using the MACD histogram for bothtrade 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
Theconcept behind MACD is fairly straightforward. Essentially, itcalculates the difference between an instrument's 26-day and 12-day exponential moving averages (EMA). Of the two moving averagesthat make up MACD, the 12-day EMA, is obviously the faster one, whilethe 26-day is slower. In the calculation of their values, both movingaverages use the closing prices of whatever period is measured. On theMACD chart, a nine-day EMA of MACD itself is plotted as well, and itacts as a trigger for buy and sell decisions. MACD generates a bullishsignal when it moves above its own nine-day EMA, and it sends a sellsign when it moves below its nine-day EMA.

The MACD histogramis an elegant visual representation of the difference between MACD andits nine-day EMA. The histogram is positive when MACD is above itsnine-day EMA and negative when MACD is below its nine-day EMA. Ifprices are rising, the histogram grows larger as the speed of the pricemovement accelerates, and contracts as price movement decelerates. Thesame principle works in reverse as prices are falling. See Figure 1 fora good example of a MACD histogram in action.

Figure 1: MACD histogram. Asprice action (top part of the screen) accelerates to the downside, theMACD histogram (in the lower part of the screen) makes new lows

Source: FXTrek Intellicharts

The MACD histogram is the main reason why so many tradersrely on this indicator to measure momentum, because it responds to thespeed of price movement. Indeed, most traders use the MACD indicatormore frequently to gauge the strength of the price move than todetermine the direction of a trend.

Trading Divergence
Aswe mentioned earlier, trading divergence is a classic way in which theMACD histogram is used. One of the most common setups is to find chartpoints at which price makes a new swing high or a new swing lowbut the MACD histogram does not, indicating a divergence between priceand momentum. Figure 2 illustrates a typical divergence trade.

Figure 2: a typical (negative) divergence trade using a MACD histogram. At the right-hand circle on the price chart, the pricemovements make a new swing high, but at the corresponding circled pointon the MACD histogram, the MACD histogram is unable to exceed itsprevious high of 0.3307. (The histogram reached this high at the pointindicated by the lower left-hand circle.) The divergence is a signalthat the price is about to reverse at the new high, and as such, it isa signal for the trader to enter into a short position.

Source: Source: FXTrek Intellicharts

Unfortunately, the divergence trade is not veryaccurate - it fails more times than it succeeds. Prices frequently haveseveral final bursts up or down that trigger stopsand force traders out of position just before the move actually makes asustained turn and the trade becomes profitable. Figure 3 demonstratesa typical divergence fakeout, which has frustrated scores of traders over the years.

Figure3: A typical divergence fakeout. Strong divergence is illustrated bythe right circle (at the bottom of the chart) by the vertical line, but traders who set their stops at swing highs would have been taken out of the trade before it turned in their direction.

Source: Source: FXTrek Intellicharts

One of the reasons that traders often lose with thisset up is they enter a trade on a signal from the MACD indicator butexit it based on the movein price. Since the MACD histogram is a derivative of price and is notprice itself, this approach is, in effect, the trading version ofmixing apples and oranges.

Using the MACD Histogram for Both Entry and Exit
Toresolve the inconsistency between entry and exit, a trader can use theMACD histogram for both trade entry and trade exit signals. To do so,the trader trading the negative [url=]divergence[/url]takes a partial[url=]short[/url] positionat the initial point of divergence, but instead of setting the stop atthe nearest swing high based on price, he or she instead stops out thetrade only if the high of the MACD histogram exceeds its previous swinghigh, indicating that momentum is actually accelerating and the traderis truly wrong on the trade. If, on the other hand, the MACD histogramdoes not generate a new swing high, the trader then adds to his or herinitial position, continually achieving a higher average price for theshort.

[url=]Currency traders are uniquely positioned to takeadvantage of this strategy because with this strategy, the larger theposition, the larger potential gains once the price reverses - and[/url] in FX, you can implement this strategy with any size of position and not have to worry about influencing price. (Traderscan execute transactions as large as 100,000 units or as little as1,000 units for the same typical spread of three to five points in themajor pairs.)

In effect, this strategy requires the trader to average upas prices temporarily move against him or her. This, however, istypically not considered a good strategy. Many trading books havederisively dubbed such a technique as "adding to your losers".However, in this case the trader has a logical reason for doing so -the MACD histogram has shown divergence, which indicates that momentumis waning and price may soon turn. In effect, the trader is [url=]trying to call the bluff[/url]betweenthe seeming strength of immediate price action and MACD readings thathint at weakness ahead. Still, a well-prepared trader using theadvantages of fixed costs in FX, by properly averaging up the trade,can withstand the temporary drawdowns until price turns in his or herfavor. Figure 4 illustrates this strategy in action.

Figure4: The chart indicates where price makes successive highs but the MACDhistogram does not - foreshadowing the decline that eventually comes.By averaging up his or her short, the trader eventually earns ahandsome profit as we see the price making a sustained reversal afterthe final point of divergence.

Source: Source: FXTrek Intellicharts

Conclusion
Like life, trading is rarely blackand white. Some rules that traders agree on blindly, such as neveradding to a loser, can be successfully broken to achieve extraordinaryprofits. [url=]However, a logical, methodical approach for violatingthese important money management rules needs to be established beforeattempting to capture gains. In the case of the MACD histogram, tradingthe[/url]indicator instead of the price offers a new way to tradean old idea - divergence. Applying this method to the FX market, whichallows effortless scaling up of positions, makes this idea even moreintriguing to day traders and position traders alike.

by Boris Schlossberg,

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