| MACD Histogram and Momentum
Divergence is the trading strategy I use
in my Forex trading.
Momentum is the rate of acceleration of
price movement. I like momentum
because it peaks before price. The
longer the period of time the momentum
weakness, the more likely it is that the
price will decline, or vice versa.
MACD involves a faster
(12-period) and slower (26-period)
moving average, it functions as a
momentum indicator. The histogram
shows the difference between the main
MACD line (the 12-26 line) and the
nine-period trigger line. The
histogram also gives important
divergence signals. Negative divergence
occurs when prices rally to a new high
or back to the same level and the
histogram is lower. Positive divergence
occurs when prices reach a lower low,
but the MACD histogram is at a higher
level. The theory is
simple:
If the price makes new highs or new
lows, divergence would occur when MACD
Histogram or Momentum does not.
Illustrated in the following chart:
When divergence occurs, I'd place a
trade. I only place limit orders
and set up the profit taking and stop
loss limit orders at the same time.
Once the trade is in the profit range, I
would adjust the stop loss level daily.
I understand there are multiple ways
to set up stop loss or profit taking
points by analyzing support and
resistance, pivot points, and etc.
However, I don't like to make my trading
so complicated and over analyzing the
markets. I like to keep it simple.
As long as my trades are profitable,
that's all it matters. After all,
I am in the market to make money, and
not to prove my analysis or theory is
right or wrong. |
