Divergence is one of the most powerful tools that can be used to read forex market. Even more so, when applied on MACD forex indicator and manually drawn trendlines. This forex strategy works best when used on 1H time frame. On lower time frames, more false signals can be experienced.
Entry:
We draw trendlines to properly identify current trend. We wait for trendline to be breached by price candle, while it closes outside of tunnel boundaries. This can be considered to be trend breakout.
To validate and confirm the signal we move to MACD forex indicator. There we look for divergence between price itself and indicators interpretation of the price.
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SELL: In uptrend.Trendline breakout. New candle closed outside of trend boundaries. New price high was created (outside of trend tunnel). MACD failed to render new high according to its calculation.
BUY: In downtrend.Trendline breakout. New candle closed outside of trend boundaries. New low created. MACD failed to render new low according to its calculation. At this point we consider current forex trend unstable and its reversal probable enough for us to enter the position.
Exit:
In essence,, this is a counter trend strategy with chance of catching new significant move at its beginning. Therefore, it requires attention to Stop loss and take profit placement and its adjustment while we are in trade.
Stop loss:
SELL: Placed couple of pips above highest point of previous uptrend.
BUY: Placed couple of pips below lowest point of previous downtrend.
Take profit:
After floating profit reaches 20 – 30 pips, we move stop loss to break even. We periodically move it as the price moves in our direction to protect profit. We do not set predetermined TP as we try to take advantage of what might be newly formed trend.
