What is MACD Divergence?
The Moving Average Convergence Divergence (MACD) is a momentum indicator. Divergence occurs when the price action and the MACD indicator move in opposite directions. This disagreement often signals that the current trend is losing momentum and a reversal is imminent.
Why it works
If price makes a new high but MACD makes a lower high, it means the buyers are exhausted. Despite the higher price, the strength behind the move is fading.
Trading Strategy
Bullish Divergence (Buy)
- Price makes a Lower Low.
- MACD makes a Higher Low.
- Entry: When MACD histogram flips positive or price breaks resistance.
Bearish Divergence (Sell)
- Price makes a Higher High.
- MACD makes a Lower High.
- Entry: When MACD histogram flips negative or price breaks support.
Disclaimer
Divergence is a leading indicator but can be false in strong trending markets. A "hidden" divergence is a continuation signal, while "regular" divergence is a reversal signal. Ensure you know the difference.