It is based on the divergence phenomenon and MACD indicator. MACD is the most famous indicator retail traders use to forecast the market. But we can get high probability setups by combining MACD and divergence.
Working of MACD divergence indicator in MT4
The MACD indicator consists of three components histogram, moving averages, and divergence lines.
The histogram shows the average price movement with time, oscillating around the zero line. So, you can identify the momentum of sellers and buyers in the market.
Moving averages are the second component of this indicator. 12 and 25-period moving averages are used in the MACD indicator. These MAs show the trend’s direction and signal a trend reversal in the market. The crossover of moving averages signals a trend reversal in the market.
The third component is divergence lines. These lines show the real-time divergence between the price and indicator.
What is divergence?
Divergence is the deviation between the actual price and the value of the indicator’s data. For example, if the price moves upward, the indicator should also move in a bullish direction. But if they are moving in the opposite direction simultaneously, the indicator or price is diverging.
There are two types of divergence in the market
- Regular divergence
- Hidden divergence
If you want to learn in detail about divergence, then click here.
Signals are generated based on moving average crossover and divergence.
When bullish divergence forms on the indicator, wait for the crossover of two moving averages in the bullish direction. Then place a buy order and hold the trade until a reversal moving average crossover does not happen.
When bearish divergence forms on the indicator, wait for the crossover of two moving averages in the bearish direction. Then place a sell order and hold the trade until a reversal moving average crossover does not happen.
MACD divergence indicator is the best price-action based indicator used in MetaTrader 4 because this indicator analyzes the lower lows and highs to draw divergence lines.
I will recommend using this indicator on higher timeframes like 4H and daily.Download indicator