Thirdly, the divergence trading method. This method is where trades are opened when the MACD indicator and price diverges (acts opposite to each other). Identifying divergences can be incredibly useful as it compliments my personal market theory. My personal market theory (along with renowned investors) is that prices cannot go in one direction indefinitely. This means that at some point, price will not move as strong as it did before, or that it will reverse. Many of you will realise that this is very similar to market bubbles where price increases rapidly, slows and finally declines.
Below is an example of a bearish divergence (bearish is another term for negative outlook/decline). At point 1a price made a high, this is also shown on the MACD indicator at point 2a. Price then makes a higher high at point 1b, however if you pay close attention to point 2b, the indicator has made a lower high (2b is lower than 2a). This is called bearish divergence as price is increasing the indicator which measure momentum/strength is getting weaker. This is a sign that price could be about to fall, which it does as the red arrow points out.
Furthermore there is also an example called bullish divergence. Bullish divergence is another term for a positive outlook/increase. From point 1a, 1b and 1c price declines to make lower lows, 1b is lower than 1a, and 1c is lower than 1b. If you then draw your attention to the indicator you will see that it is making higher lows, 2b is higher than 2a, and 2c is higher than 2b. This means that although price is declining the momentum of the decline is slowing and will reverse soon. The green arrow represents this reversal perfectly.