A New Look At MACD Divergence
One of the most popular indicators among traders is the MACD. It stands for Moving Average Convergence Divergence. From a technical standpoint, the tool is quite simple, but, as they say, simplicity is genius.
MACD is a multifunctional indicator. You can use it to determine the current phase of the trend, find reversal points of the market like with oscillators, as well as recognize divergence. In this article we will look at a strategy for Binomo which will make it possible to trade more effectively on divergence.
What is divergence?
Divergence means a discrepancy or deviation. In the context of binary options trading, it is the situation when there is a discrepancy between the readings of the price chart and the trend indicator or oscillator. For example, the price may go up but the Moving Average goes down. This situation occurs when volatility rises sharply on the market, but it is not supported by a sufficient «base» which in most cases does not allow the price to move within the established trend, so it soon reverses.
The picture above clearly illustrates the essence of the phenomenon of divergence. It can be of 2 types: bearish (downward) and bullish (ascending). Let’s consider in more detail each of these scenarios.
- Bearish divergence is when the price on the chart moves within the channel and is directed upwards. Each subsequent maximum is at the level above the previous one. Despite this, the Moving Averages move in the opposite direction: each subsequent maximum is lower than the previous one. In such a situation, the trader should rely on the indicator signals. In more than 70% of cases, there is a rapid reversal of the upward trend and the beginning of a negative trend.
- Bullish divergence is when the price moves down on the chart. Candles show wave-like oscillations, and each subsequent minimum is below the previous level. At the same time, the MACD or other indicators show an uptrend. In such a situation, the trader should expect a quick start of upward price movement.
The MACD takes into account a certain period of time on the chart, calculating its average values. When the market moves too fast, it causes a discrepancy but strong trends do not originate. Before the start of the movement, the market must first strengthen. Otherwise, the probability of a rapid rollback of the chart in the opposite direction is high.
Preparing the Binomo platform
The MACD is based on Moving Averages, which in turn have an averaging formula for calculating the arithmetic mean for the period. The overwhelming majority of technical analysis indicators operate on the same principle, but there are some exceptions. One such solution is Momentum, which is a tool that shows the power of the momentum of price movement.
- asset – CRYPTO IDX if trading on a second chart with an interval of 15 seconds, or any other currency pair if the time frame is 30 seconds or more;
- indicators – the MACD and Momentum with standard period settings;
- trades – expirations on 4-5 candles taking into account the time frame, an investment of no more than 5% of the balance.
Traders are advised to take advantage of the Binomo (site) short-term trading platform. Therefore, the optimal choice is as follows: the CRYPTO IDX asset, a 15-second time frame, a trade expiration of 1 minute.
Trading signals according to the strategy
The trader should take special care when trading on divergence signals, since it will be necessary to recognize minor fluctuations.
The signal for a decrease is when 2 price maxima are formed on the chart, where the second is higher than the first. In the MACD and Momentum window, the situation is the opposite: the second maximum is lower than the first. Enter the market after the curves of both indicators overtake the N/A boundary and descend into the lower half of the window.
The signal for an increase is when a downtrend is forming on the chart, and Momentum and the MACD show an uptrend. It shows the same signs as in the case of trading on a decrease.
The trader should track the position of the fast MACD line, which has a white fill color. Often, divergence is subtle, so in order to recognize it, you will need to manually zoom in on the window of each of the indicators. The terminal functionality makes it possible not only to increase the chart elements, but also to move them freely with the mouse.
The vertical scale is adjusted by scrolling in the area of the right vertical scale of the indicator window. For convenience, you can use the horizontal line tool, but on a 15-second time frame, a quick response will be required. Skipping more than 1 candle after the formation of the signal significantly reduces the likelihood of closing the trade with a profit.