First read the article on the Moving Average Convergence Divergence (MACD) to know what is the MACD black line and the signal or the trigger grey line plus and what is a MACD histogram. When the MACD line crosses above the signal line or the trigger line, this is known as the MACD cross or a Moving Average Crossover. When the MACD line is above the trigger line, it supports a long position and when the MACD line is below the trigger line, it supports a short position.

The cross of the MACD black line and the signal grey line near the zero line is very important as it gives information about the current trend in the market. When the MACD black line crosses below the signal grey line below the zero line, it is a sell signal in the direction of the present trend in the market. On the other hand, when the MACD black line crosses above the signal grey line above the zero line, it is a buy signal.

However, MACD divergence is a much more significant signal. Divergence takes place when price is moving higher and higher whereas the MACD line is moving lower and lower or vice versa. Bullish Divergence or Positive Divergence takes place when price action is making lower lows while MACD is making higher lows. Similarly, when price action is making higher lows and MACD is making lower highs, it is knows as a Negative or Bearish Divergence.

Divergence over a shorter period of time is considered to be a much stronger signals as compared to the divergence on the longer period of time.

Always think of a divergence as a development that indicates that the market needs to take a break. Although most market reversals exhibit divergence before they take a turn, markets also exhibit divergence just before normal consolidation periods.

Now, you will also find divergence between the MACD histogram and the price action. This divergence should be considered significant. Short term divergence appears on the histogram much earlier and is considered to be more significant as compared to the MACD regular divergence.

Whatever, when trading, first try to determine the current trend. Then determine whether MACD is supporting this trend direction. The momentum on MACD histogram should be on the same side as the trade. When you see the momentum waning or a MACD cross, exit your position.

Mr. Ahmad Hassam has done Masters from Harvard University. Get this highly profitable Magic Breakout Forex Strategy by Tim Trush and Julie Lavrin FREE. Get these Correlation Trading Cheatsheets FREE.