MACD-Histogram Divergence is one of the strongest signals in technical analysis:
Put simply, technical analysis uses past price data to try predict future prices. But under the banner of TA there are as many different strategies, indicators, entry and exit set-ups and ways to evaluate the raw price data that comes from the markets, as there are traders.
No matter how you analyse your potential investments, the process of deciding what you buy and sell is only one part of being a successful trader. Money management and the right mindset are equally important, but for this article I want to focus on entries and exits using the MACD-Histogram, which stands for Moving average convergence divergence histogram.
The MACD-H indicator uses the difference between a long-term and short-term moving average to indicate whether the bulls or bears have the momentum and when that momentum may be about to shift.
MACD-H Bullish Divergence:
Now don’t get overwhelmed it is actually quite a simple entry strategy that you will find very consistent.
The MACD-H (histogram) is an indicator derived from the convergence and divergence of 2 moving averages, generally the 12 day (short-term) and 26 day (long-term) Exponential Moving Average’s and is a great indicator for tracking the momentum of the markets.
We get a MACD-H bullish divergence when the price is falling but the MACD-H is making higher lows showing that momentum in the down trend is getting weaker. Our entry signal comes when MACD-H has made a higher low and the next bar ticks up signalling bullish momentum is growing.
We must remember that looking at charts in hindsight is always much easier that is why we must develop our own trading plan so we know what we will do in all situations.
“We can never know exactly what the markets will do. If we do not know what we will do in any given situation, the game is lost”
Even more important than knowing when to buy into a stock is knowing when to sell. We always use stop-loss orders (which we’ll explain in the next section) to sell out of a position that is going against us. But it is knowing when to take profits that often cause the most stress to traders.
Here we will explain simple technique that will indicate when the steam is running out on a rally and you may want to take partial profits or exit your position completely. Remember that most penny stock trades are for short-term profits and not a long-term investment. Of course we will sometimes find great undervalued companies with solid fundamentals and future growth expectations that we may buy as a long-term addition to our portfolio.
MACD-H Bearish Divergence
In my trading plan I have obviously become very comfortable with the MACD-H indicator and trust its signals for both buying and selling. Now I want to stress again that you will most likely find your own indicators and set-ups to guide your decision-making. But thorough testing and analysis of many different types of indicators and set-ups is a very wise move no matter what you ultimately choose.
About the author
James Brine is a full-time penny stock trader with 8 years experience researching and trading OTC and Pinksheet listed companies. He now operates Ultimate Stock Review, a online penny stock education and alert service. Writing articles and educating members to help them become successful traders. For more articles and penny stock alerts visit ultimatestockreview.com and check out his other tutorials.