Some of the disadvantages of moving averages may be avoided by using the Moving Average Convergence Divergence (MACD). MACD is the difference between the fast 12-day exponential moving average (fast EMA) and the slow 26-day exponential moving average (slow EMA). Typically, this is plotted with the 9-day EMA of the indicator itself.
SIGNAL = EMA(9) [MACD],
MACD = EMA(12) [p] – EMA(26) [p]; p – price.
Bullish divergence appears when a new price bottom has not been confirmed by a new MACD Bottom.
This signifies that the prevailing trend is weak. However, it is not recommended to open positions against a weakening trend as it is valid up to the moment of reversal. Bullish divergence only indicates that the downtrend is weak, not that it has ceased. So, before you open a position against the trend, be sure to get confirmation that the trend is about to reverse (for example, the breakout of the trend line). Bearish divergence appears when a new price top has not been confirmed by a new top of the indicator.
This means that, while the bearish trend is weak, it should not be read as a signal for reversal – so be sure to seek other confirmations before opening a position.
When the price changes only slightly and MACD moves around the zero line, this signals trend continuation. In order to add Moving Average Convergence Divergence (MACD) to the chart use the “Insert -> Indicators -> Oscillators -> MACD menu sequence.
In MetaTrader 4 MACD is represented as a histogram (MACD) and a signal line (SIGNAL).
If MACD is below the zero line then trend is bearish, if it is above it then the trend is bullish. SIGNAL line and price bullish divergence/bearish convergence – a strong sign that the prevailing trend is weak. If MACD is below zero and there is no bearish convergence, and MACD histogram crosses the slow line (SIGNAL) from below, then there is a greater chance of an upside price rebound. If MACD is above zero and there is no bullish divergence and MACD histogram crosses the slow line (SIGNAL) from above, then there is a greater chance of a downside price rebound.