Convergence and Divergence are very strong signals in the various spread trading strategies. Now we will see this applied to the MACD.
Lets recall:
Bearish Divergence is when prices of the Stock, index, Forex pair are making new highs but the technical indicator is telling you the opposite, it is showing weakness.
Bullish Divergence is when, instead, prices of the Stock, index, Forex pair are making new lows but the technical indicator is not confirming the new lows, instead it is making higher lows.
Below is an example of the FTSE INDEX:
In the above example we see the FTSE100 Index, this is a spread betting example of the MACD convergence & divergence spread betting strategy.
1) Bearish Divergence – Prices are making new highs. The second peak in the FTSE100 that follows is higher than the previous peak. Instead in the MACD crossover is showing weakness as it fails to confirm the highs by not following with a new peak.
1) Bearish Divergence – Prices are making new Lows. The second trough of the FTSE100 that follows in February is lower than the previous peak. Instead in the MACD crossover is showing strength as it fails to confirm the lows, instead it is making higher lows.
Previous: Spread Trading with the MACD Histogram