Trading divergence is the most profitable for me. As long as we open the trade on the right time, divergence can be your best friend in trading. MACD Histogram is a good tool to spot divergences and it also has signal line crossover which can be used as confirmation for the divergence. Here is the example of Hidden divergence shown by MACD Histogram and confirmed with the crossover.
If you compared the tops shown by the white line on the price chart, it shows a down trend (lower high). But, on the histogram it shows an uptrend (higher high). This condition is well known as a hidden divergence.
Spotting divergence is important but when we should open SELL position if we see such above divergence? OK you can use the following filter to confirm the divergence and open your position.
1. Divergence breakout
2. MACD line cross over
On above example, the hidden divergence is confirmed by the MACD line crossover. When the blue line cross the red line from above, that is the sell signal. Always put your stop on the previous high when sell.
