How can you know if divergence between price and the Moving Average Convergence Divergence indicator (MACD Divergence) is right for you? To answer this question, you might want to see how MACD and especially MACD Divergence indicated some prosperous times in which to buy stocks and Exchange Traded Funds, or ETFs. One of the best resources to see how MACD Divergence produced signals to buy and/or sell stocks and ETFs is backtesting.

You may find helpful the following summary of trades simulated by the backtesting engine on the SPY (the ETF of the S&P 500 composite):

In October, 2002, and March, 2003, the MACD divergences are particularly interesting because they are MACD positive divergences. If you plot it, you can see that the MACD technical indicator shows a divergence. The definition of MACD divergence is: as price hits a new low, the MACD does not confirm with a new low of its own. The backtesting strategy in fact registered a profitable trade from a MACD bullish divergence buy signal in October, 2002 to a MACD bearish divergence sell signal in September 2003.

In August, 2004, another interesting MACD divergence took place on the SPY. Previously choppy, the SPY had been trading in a range when the MACD bullish divergence signaled this bottom was different. The MACD bullish divergence was positively confirmed, as evidenced by the SPY breaking out of the range.

In March 2009, the MACD divergence reveals a profitable buy signal. The most recent profitable trade on the SPY came during a time that the three other attempts at finding a bottom failed due to the credit crisis. As you have learned, nothing is perfect, and the MACD divergence is no different.

This is intended as an educational example of the inner workings of the MACD divergence.

Please note the sample size of one, the SPY, and therefore you can see that you cannot rely on this as a representation of future performance.

Hopefully, these charts have been helpful to you in answering for yourself if the MACD divergence is right for you. Remember, you will want to take more than one example into account before you trade, and therefore this is the beginning of your research and not the end.