Divergence Analysis
■ (^) Every time the two moving averages meet, the MACD has a value of zero, that
is, it will be at the zero level (see vertical lines I to V)
■ (^) Every time the MACD and its signal line meet, the histogram has a value of
zero (see sample points A to D)
■ (^) The histogram reacts faster than the MACD, identifying divergences at a low-
er wave degree (see standard bearish divergence between points 1 and 2, and
standard bullish divergence between points 3 and 4)
■ (^) There is a standard bullish double divergence between points 5 and 6, where
both the MACD and its histogram display rising troughs
■ (^) There is also double divergence at points 5 and 6, resulting from two over-
lapping standard divergent setups, one occurring between point 5 and 6 with
another from the lowest point in the MACD to point 6
9.3.11 Divergence as Leading indicator
Divergence provides one of the best early warnings of an impending trend change
or reversal. It transforms a lagging indicator into a leading indicator. Although
that may be the case, it is nevertheless prudent to only act when there is price
confirmation, which provides a price‐based trigger for entry, as well as evidence to
support a bullish or bearish forecast. As with any technical tool, divergence should
be used in conjunction with other technical indicators. The objective is to locate a
higher probability entry around supportive and resistive confluences. Figure 9.64
shows how divergence is used in conjunction with other indicators to locate po-
tential reversals in Gold (XAUUSD).
The windows at the bottom of the chart show the accumulation/distribution
line, along with a cycle‐tuned stochastic oscillator. The overbought and oversold
levels in the stochastic are indicated on the chart as OB and OS, respectively.
Time lines 1 to 8 mark the points in the gold market when the overbought level
was tested. Point A, which represents resistance, is the first actionable point
Figure 9.64 Divergence as a Leading Indicator.
Source: MetaTrader 4