Welcome , in the article i will discuss about one of the most powerfull and famous indicator that is macd indicator. Here i will tell you the reason, why it is more powerful.
Even with a bare chart and with this single indicator you can find a profitable trade; I will also tell you how to setup it and will use properly.
I will also shows you an example and a trade setup where i have initiate a trade based on this indicator and that was profitable.
Positive divergence and Negative divergence
In this article we will not discuss about definition , our main focus would be how to properly use it, if you don’t know the proper way of using this indicator then there is no benefit.
So with the help of this indicator we try to find a positive or negative divergence on the chart. So what is divergence a positive divergence occurs when the price of an asset or script or any stock makes a new low while on indicator makes a higher high.
Similarly a negative divergence occurs when the price makes a new high but indicator makes a lower high. I think it will be little confusing to understand , but don’t worry when i will use the chart and diagram then it will be easy to understand.
To understand macd indicator, positive divergence and negative divergence let’s take an example, Here i will use a stock Biocon the chart of 20th june 2020 , first of all we will understand the negative divergence.
The setup for macd indicator will be (12, 26 , 9) and the timeframe would be one day and we will use the candlestick chart.
Here is the chart of Biocon and here you can check clearly that stock is facing a resistance around 400 zone and from several days stock is consolidating in this range.
So if you will notice the stock has made a new high of 404.60 on 18th June 2020 and finaly at the end of the day stock made a bearish candle.
Here we need to find two swing high, so how to identify a swing high ? if a stock make a new high and the previous day and next day candle’s high would be lower than we can say that swing high , so where we will connect two swing high, clearly check it in the below chart.
So here if you will notice then you will find that the right side of the line is little bit high and left side is little bit low from right side. now here we will point out two points on macd indicator (here on macd indicator you need to use the macd line which is in black not the signal line which is in red). Check it in below chart.
Now connect these two points made on macd indicator, and draw a line, then you will find that the line is not similar or parallel to to above line, if the line would be parallel with above line then there would be no divergence.
so we will not initiate the trade, but here in the chart the left point of indicator line is higher than the right point , so here we are finding a divergence , so we can initiate a trade.
Now you can take a trade , because is negative divergence is confirmed, you can sell below the low of bearish candle (pinbar) and put a stop loss above the high of pinbar candle , here you can make a trade with 1:2 risk reward rasio , means your target should be double of your stop loss.
Here if you will notice the stock has already made a low of 10 points closed at the level of 381.25, so now if you don’t want to take your risk then you can trail the stop loss at your buying price means the high of the next day candle.
So this is the way how you can make a good profit by using this macd indicator, generally we initiate for a negative divergece at the top when the stock face a resistance after a good upside move this is also shows a short term reversal.
Similarly you can find a positive reversal at the bottom when you find a reversal or bullish pinbar pattern in the bottom after a long downtrend.
I will discuss or will take a example in some other article in coming session. To know about trader’s most favourite chart patterns check the link Top Chart Patterns. Till then continuing reading my blogs and support us by sharing and this article to your social friend groups.Thanks for reading and spending your time. To open a demat account go to the link Open Demat Account.
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