The best way to use the MACD (Plus, how to use it to confirm entries)

I only use the MACD indicator to show me one thing: a change in a price's momentum.

Hi Trader, Let's examine one of the last steps I take to confirm low-risk entries: Momentum divergence on the MACD Histogram. Let's dive right in.

*My trading methodology is aimed at achieving one specific goal: Finding the end of corrections and entering low risk trades when the trend resumes again. (There's a recap of the smaller, manageable steps we take to achieve this at the end of this mini-lesson. Feel free to read more on my website.)

MACD HISTOGRAM: MOMENTUM DIVERGENCE

The chart above shows a downward trending market. By using our MACD-Histogram, we can see that when price started to accelerate downwards, the blue histograms grew larger and larger (below the zero line). Right after the middle mark on the chart, however, price kept moving downwards BUT the blue histograms showed a decrease in momentum, and became shorter and shorter (closer to the zero line). The momentum displayed by the MACD-Histogram started to dry up even as price continued its way downwards. This is known as momentum divergence (or price divergence). Simply stated, price and momentum are moving in opposite directions.

Now, before we get too excited... There is one BIG problem with momentum divergence indicators... They can show divergence for a long period of time in a strong trending market, rendering this indicator almost useless when trying to determine the ends of very strong trends. This is why I never use the MACD-Histogram on its own, but in combination with other tools to make better trading decisions. When used as part of my larger strategy, the MACD-Histogram becomes an extremely important tool that I never trade without.

Momentum divergence is one of the four entry conditions I look for.

Here's an example of a previous entry on my AUD/USD chart. (Momentum divergence is in the final step of my strategy process, but remember: there's a review of all the steps below.) This is where the MACD-Histogram proves its worth. Price entered the zone where I was looking for the end of a correction, and it did so twice. The first time was on increased momentum (red line on histogram), which signaled no momentum divergence. The second time price entered my zone was on momentum divergence (green line), and after I spotted another of my entry conditions in the form of a reversal bar (red oval), I knew that it was time to place an order.

The trade played out beautifully, and the MACD Histogram allowed me to pinpoint the end of a correction ahead of time. This gave me more than enough time to prepare for the trade and nail the absolute low of the correction. Using a smaller time frame during those last steps, together with my MACD-Histogram, also made it possible to reduce my risk and stack the odds heavily in my favor.

EPS: Strategy Review Determining trend or when a trend may end Finding areas or levels where a correction may occur Confirmation of a correction Using market geometry to find the most likely area where a correction could end Following a set of entry conditions to signal a trading opportunity Entering low risk trades with large profit potential

Conclusion I only use the MACD-Histogram to show me one thing: a change in a price's momentum. My Exponential Profits System (EPS) was designed to pinpoint only the highest probability entries and keep us out of bad trades, and momentum divergence is a critical part of the strategy. If you'd like to see how it all works, you can learn more on my website. Click here to check it out. Thanks for reading along, now go put your MACD Histogram to work! Until next time, Happy and profitable trading.

Important Disclaimer: Price Action and Income provides education. We are not trading advisers and we do not make suggestions to our visitors to buy or sell any particular commodity or security. The information on our website is based on personal opinions and is to be used for educational purposes only. Any actions you take based on the information on our website is to be at your own discretion. Trading Is Risky: Never, ever trade with funds that you cannot afford to lose. All trading investments (Forex, stocks, options, futures, etc.) are risky. Never trade with borrowed funds or your life savings. U.S. Government Required Disclaimer: Commodity Futures Trading Commission. Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

Unsubscribe Price Action & Income 816 Ligonier St. Latrobe, Pennsylvania 15650 United States