Friday, May 15, 2009

Forex Technical Analysis with MACD Divergence as Trend Reversal Signal

Trend trading is the most profitable trading strategy in fx currency trading. The catch is that the trend is only your friend until it ends. Since day trader enter and exit their positions the same day, it's vital to gauge the current trend and moment for the trading day. No matter what the previous trend is, there are only two scenarios for current trading day. The price action can be either following the previous trend or reversing the trend.

MACD divergence is a useful technical analysis tool giving hint for potential trend reversal. There are two kinds of divergences. Bearish divergence happens by the end of an uptrend. The market makes higher highs, while MACD forms lower highs; Bullish divergence occurs at the end of a downtrend. The market makes lower lows, while the MACD forms higher lows.

MACD divergence alone can't be used as forex trade signal. Before making any long or short commitment, the current price action should justify the divergence. In another words, confirmation is needed to open a counter-trend day trade. For example, there is a bullish divergence, so the current price is making a lower lower. If the market find support at the new low level and heading upward by either making higher lows or penetrating and standing above resistance, that's the kind of price action for confirmation of trend reversal. If the market keeps making lower lowers, a counter-trend position should never be initiated in that case.

Yesterday was the fourth day of closing down for yen. If the price remain above yesterday's low, it would be unwise to initiate a short position. On hourly candlestick charts, there is a hammer just briefly penetrated yesterday's low 95.13 by 3-pip. The hammer confirmed the support. Dive into the 15-min chart, there is a MACD bullish divergence. For the rest of trading session, yen stays above the new low and of course the previous day's low, while heading north by forming higher lowers, penetrating resistance. This price action offered a high probability trading opportunity to exploit the current upside momentum.

yen hammer confirmed support

yen bullish macd divergence

British pound formed a similar bullish MACD divergence on 15-min candlestick chart. The higher lows confirmed current upside momentum and offered multiple opportunities for establishing long day trades.

pound bullish macd divergence


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