There are a number of tools that you can use when you look at FX trading. One of these tools is the MACD technical indicator. This indicator is used by a lot of trades because of the range of information that you can get from it. You are able to get information about trends and momentum from the MACD. One of the ways that you can use it to trade is through the MACD divergence.
What is the MACD?
The MACD or moving average convergence divergence is a technical indicator. The concept behind the indicator is actually very simple. The MACD calculates the difference between the 16 and 12 day EMA. When you look at the chart with the MACD you will see that these moving averages are plotted. The histogram that you get with the chart is the visual representation of this difference.
Trading the Divergence
The divergence trade is not actually the most accurate of trades and this increases the risks of using it. However, many traders find that he rewards you can get from this trade outweigh the risks that you face. When you look for a divergence you are going to look for prices that swing high or low with no divergence on the MACD histogram.
The reason why this trade does not always work relates to what you are looking at and working with. When you analyse the charts you are looking at the MACD which is a derivative of the price and not the actual price. However, when you trade you are going to be trading on the actual price and not the derivative.
Your FX Trading Entry and Exit Points
When you trade with the divergence you are going to enter the trade on the MACD prices and exit on the actual prices. One of the ways that you can resolve the inconsistency of the FX trading is to use the MACD prices for the entry and exit signals of the trade. Instead of placing your stop loss orders and exit points according to the price movement you are going to set them at the corresponding MACD prices.
The Risks of The Trade
There are a number of other risks that you have to be aware of that relate to the MACD divergence trade. The unreliability of the trade is the first risk that you face along with the difference in the exit and entry prices. However, these can often be resolved. There are other risks that will increase the overall risks of your trading when you use this strategy.
When you use the MACD divergence trade you may have to average up or down when the price moves against you. This is a very dangerous move to make on the forex market because it often results in adding to your losses. When you add to your losses you are increasing the amount you risk on a single trade. This is often seen as emotional trading and something that you should be looking to avoid.
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