Overview of swing trading MACD / price divergence
By Sue MacD.
The charts produced within these templates are very clean and uncluttered intentionally. The 8 & 21 ema’s are sitting on top of price and color coded to align with the MACD 2 Lines. The 8 ema is blue and the 21 ema is red. The MACD 2 Line is used with the default settings (12/26/9 ema’s) with the faster line is blue and the slower line is red (to align with the coloration of the 8 & 21 ema’s).
Throughout the training documentation, I will refer to the “blue lines being above or below the red lines” – or both “blue lines have turned up”….. In this trading methodology, there is no reference to the zero line or the actual position of the cross when referencing the MACD – just which line is above or below the other.
There are both weekly and daily templates. The best potential trades have the following characteristics:
- They show setups on both the weekly and daily scans.
- The charts will show clean bottoms or tops with deep V or inverted V shaped price patterns
- The higher risk trader can take an entry without waiting for the cross of the 8 & 21 ema’s
- We provide a confirmation signal in the template using the cross of the 8 & 21 ema’s
- Waiting for the cross of the ema’s is my preferred entry (especially in trades involving setups on both timeframes)
- There is a sequence that usually occurs making trade entries more consistent:
- It is normal for the MACD lines to cross and spread before the 8 & 21 ema’s
- Therefore, think of the MACD as the “get ready”
- Think of the 8 & 21 ema cross as the “get set”
- And then before you “GO” – check the following:
i. Does the overall market action support your proposed trade?
ii. Take a moment to check the real time charts to make sure they are holding strongly in your proposed direction?
iii. There MUST be a divergence:
- If you are anticipating a long trade – then the MACD must be higher at the time of the second hit of price at the double bottom.
- If you are anticipating a short trade – then the MACD must be lower at the time of the second hit of price at the double top.
- There MUST be a divergence between where the MACD says price should be VS where it actually is – and that divergence (the MACD) should be in the same direction you intend to trade.
- CAUTION before you “GO” –
i. Do NOT enter on a gap
ii. Do NOT enter at the end of the day with a large price move
iii. Do NOT enter on a candle that has closed significantly off the 8 ema
- Wait for price to flag or retrace back to the 8 ema
- Often the early stages of reversal are volatile and you want the best entry possible (especially if trading options)
Overview of how to use the scans
The Double Bottom Output from both the Weekly and Daily charts is used to research reversals to the LONG side.
The Double Top Output from both the Weekly and Daily charts is used to research reversals to the SHORT side.
The output from the scans under the CONFIRMATION heading
Dir = Direction of the cross of the 8 & 21 ema’s (text ABOVE & BELOW)
ABOVE indicates that the 8 (blue line) has crossed ABOVE the 21 (red line)
BELOW indicates that the 8 (blue line) has crossed BELOW the 21 (red line)
Up = the number of weeks or days since the cross ABOVE (depending on the template run)
Dn = the number of weeks or days since the cross BELOW (depending on the template run)
The output from the scans under the 4 Columns with % data are best explained at the link provided. The 2 data elements that are essential for the reversal entry are below.
Div = YES or NO – is there a divergence where price is VS where the MACD says it should be
- This one is critical – you MUST have a YES to consider taking a reversal trade.
Since = is the number of Weeks or Days since the pattern set up (depending on the template run)
One of the benefits of running these scans is that once a setup or potential setup flag, they will continue to appear on the scans (as the weeks or days in their read outs expand). This reduces the missed trades we all experience as we deal with day to day distractions. They will continue to show in the scan until the condition ends.