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Chapter 20, Part II. Trading Breakouts. Page 7

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    And the last thing that I want to discuss today is application of MACD Histogram for assessment of potential breakout. But tell me first, what MACD Histogram indicates?

    Pipruit: Well, it shows the distance between MACD lines.​

    Commander in Pips: That’s correct. Precisely speaking, it shows momentum (do not confuse this with the Momentum indicator). As the histogram gets higher – as difference between MACD lines greater, hence current market momentum is stronger. When some trend develops on the market we want to see increasing momentum, when price accelerates in the direction of the trend. If that does not happen, and momentum does not support further development of the trend – then this trend has problems and can come to an end – look at the chart #6:

    Chart# 6 | Daily EUR/USD and MACD Histogram

    Pipruit: Commander, but we’ve spoken about that already – it calls divergence!​

    Commander in Pips: Not quite. Although it looks like divergence, but this is another kind of divergence – do not mix them. I better call that as momentum decreasing. Take a close look at MACD itself – do you see any divergence?

    Pipruit: No.​

    Commander in Pips: That’s it - there is no classical divergence that we’ve discussed. MACD supports the trend well. But momentum of this trend based on MACD histogram becomes weaker and weaker. And what do we see then – boom! Breakout….

    Pipruit: Cool stuff!

    Commander in Pips: So, we have to keep an eye on the MACD Histogram also, since this is quite another indicator and lets us show things that simple MACD does not. It could give you an early warning that the current trend becomes weaker and breakout is close. Even more, this kind of divergence as you’ve called it, tells us that this potential breakout will have nice chances to be real.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them below, we'll notify Sive, and get them answered within 1 week.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
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