MACD divergence strategy

Why it works

Momentum usually leads price. When it weakens while price still prints new highs, buyers are getting tired and a correction or reversal becomes more likely.

Divergence alone is not a signal: strong trends can diverge several times before turning. The trade is the break of structure that follows the divergence.

The rules

Setup

• Price makes a higher high; the MACD histogram makes a lower high (bearish divergence). The opposite for bullish divergence.
• The divergence happens at a meaningful level: a prior high, resistance or round number.

Entry

• Sell when price breaks below the last higher low (change of character).

Stop loss

• Above the divergent high.

Exit and management

• Target the start of the last impulse, or 2R.

Filters that improve it

• Prefer divergences on 1H and above.
• Skip divergence against a very strong trend unless the higher timeframe also shows weakness.

Worked example

Illustrative EUR/USD example on 4H: price makes highs at 1.0950 and 1.0985 while the histogram peaks fall from 0.0012 to 0.0006. Price then breaks the higher low at 1.0940. Sell at 1.0938, stop at 1.0992, target 1.0830 (2R).

Illustrative numbers, not a recommendation.

Common mistakes

• Shorting the first divergence in a strong trend without waiting for the break.
• Comparing histogram peaks that are not from the same swing.

How to practise it

In Candlemind add the MACD template from My indicators and mark the two highs on both price and the histogram. Only act after the structure break.

Pre-trade checklist

1. New price extreme
2. Lower histogram peak (or higher trough)
3. At a meaningful level
4. Entry on the structure break
5. Stop beyond the divergent extreme

Frequently asked questions