Before trading with MACD Divergence, it is important that you understand the basics in MACD trading divergences.
A simple way of explaining the MACD and trading MACD divergences is that it provides the trader with the difference between a stock’s 26 day Exponential Moving Averages (EMA)and 12 day Exponential Moving Averages (EMA). This difference (MACD line) plotted with its 9 day period EMA (MACD signal line) creates the MACD Histogram. The Histogram is used as an indicator to buy or sell. A Bullish signal is evident when MACD line moves above its 9 day EMA and movement below its 9 day EMA, a Bearish signal. The EMA periods may vary, however, a faster EMA over a 12 day period and slower EMA over a 26 day period is the most commonly used with the 9 day signal period. MACD trading divergence is a divergence between the MACD indicator and price.
In MACD trading divergences, positive MACD Divergence is when there is a lower low in price but the MACD indicates a higher low. (Indication to go long). When there is a higher high in price but the MACD indicates a lower high it is known as negative MACD Divergence. (Indication to go short)
During an uptrend it is not uncommon to have 3 or 4 higher highs in price with the MACD indicating 3 or 4 lower highs. On the other hand it is not uncommon to have 3 or 4 lower lows in price with the MACD indicating 3 or 4 higher lows during a downtrend.
Hidden Diversion in MACD trading divergences is a comparison of the higher lows of price with the lower lows indicated by MACD in an uptrend and the lower highs of price with the higher highs indicated by MACD in a downtrend. Hidden Divergence indicates as to whether or not the trend will be continuous.