Beware of Fake MACD Divergence
I bet most of you guys know what is a Forex MACD Divergence. In case there are some of you who do not have any idea what is it, you can take a look at my blog post below for more information.
If you have been following my blog, you will know that I have talked about something known as false alarm trade before. One of the problem that most new traders tend to face is such trade which leads them to more losses than win in their trading.
One of my readers ask me whether he will make money simply by entering a trade whenever a MACD divergence occurs, my answer to him is NO.
Trading is actually not very complicated but it is not as simple as just entering based on one indicator.
Indeed when there is an occurrence of MACD divergence, the price will usually reverse within a period of time. The keyword here is “period of time” and not immediately, this is because there is a possibility of the price forming multiple MACD divergence before it reverses its direction.
If you were to enter once you see a divergence, you will be stopped out whenever this multiple MACD is formed.
So in my term, I will call such divergence Fake MACD divergence. Lets take the picture below for example,
You can see that the price has formed a divergence with the macd and this is what we call a positive MACD divergence. However, when most traders think that the price is going to reverse upward and they enter a BUY trade. Below is what happen
So if you were to enter on the earlier divergence, you will be stopped out and this is what I call fake MACD divergence. Such fake movement is what I call false alarm trade. You won’t be surprised that the price actually move on to form the third divergence
If you were to enter a BUY trade during that third divergence, you will be stopped out again as the price continue to form the fourth divergence.
Therefore my advice to all of you guys out is to always have a set of validation criteria for whatever forex strategy you are using. Your strategy must always have a way to help you validate whether the setup is valid or just another false alarm movement.
Most new trader thought that a strategy is just one that tells you where to enter and where to place your stop loss and target profit.
In fact, a reliable forex strategy is one that has a pre trade setup check to alert the trader of incoming trading opportunity, a set of validation criteria to help the trader validate whether the trade is valid or not as well as clear entry signal with precise stop loss and target profit.
So from now on, never trade based on just the signal of a forex indicator. You should always do some fine tuning or do some adjustment to your indicator to check if the trade is valid or not.
For the MACD divergence, you can try to add in some major S&R levels into the strategy. Let says that the price has hit a major support or resistance like the pivot point or 200 EMA and you see the formation of a divergence, this will give you more winning probability as compared to the previous situation stated above.
After going through this blog post, I hope that you now know more about macd divergence trading and will be able to avoid those fake divergence as stated above.