MACD divergence

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MACD divergence is a trading strategy used by many traders in the financial markets to identify potential trading opportunities. It relies on the concept of divergence, which occurs when two related indicators move in opposite directions, indicating that momentum or trend is being lost. In this case, the two indicators are Moving Average Convergence/Divergence (MACD) and price action.

Moving Average Convergence Divergence (MACD) divergence is a technical analysis tool used to identify potential trend reversals in financial markets. It is based on the idea that when the price of an asset and the MACD indicator are moving in opposite directions, it may indicate that a trend reversal is imminent.

There are two types of MACD divergence: bullish divergence and bearish divergence. Bullish divergence occurs when the price of an asset is making lower lows, but the MACD is making higher lows, indicating that momentum is strengthening and a potential reversal to the upside is imminent. Bearish divergence occurs when the price of an asset is making higher highs, but the MACD is making lower highs, indicating that momentum is weakening and a potential reversal to the downside is imminent.

The key to MACD divergence is identifying both rising and falling trends. During a rising trend, if one moving average is trending higher than its companion, but then starts to fall behind or turn lower while the other continues higher, this could be interpreted as a potential bearish reversal signal. Conversely, during a falling trend, if one moving average is trending lower than its companion, but then starts to turn higher while the other continues lower, this could be interpreted as a potential bullish reversal signal.

The best way to identify potential MACD divergences is to look at a chart with both MACD and price plotted on it alongside one another. By studying these charts closely, traders can identify moments where there seems to be an imbalance between the direction of MACD and that of price action. As soon as such discrepancies are spotted, traders should investigate further by looking at other indicators such as relative strength index or stochastics to determine whether there's indeed a valid signal present or not.

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