MACD Divergence Reversal

Entry Logic

• Enter long on a bullish MACD divergence, where the price makes a lower low but the MACD histogram makes a higher low.
• Confirmation is a bullish candlestick pattern on the 4-hour chart.
• Use a 4-hour timeframe for this setup.
• Entry should be above the high of the confirmation candle.
• This setup works best in a trending market that is showing signs of exhaustion.

Exit Logic

• The profit target is a 2:1 risk-reward ratio from the entry.
• Scale out 50% at the 2R target.
• Trail the remaining position with the 50-period SMA.
• Exit if price makes a new low.
• Exit on a confirmed bearish MACD divergence.
• Exit if the trade is not profitable within 10 days.
• Exit if the MACD line crosses below the signal line.

Stop Loss Structure

• Place a hard stop below the low of the divergence pattern.
• A soft stop is a close below the 50-period SMA.
• Maximum dollar loss is $1000 per trade.
• Maximum percent loss is 2% of the account.
• The structural stop is below the low of the confirmation candle.

Risk Management Framework

• Risk 1.5% of the account per trade.
• Daily loss limit is 4.5% of the account.
• Weekly loss limit is 9% of the account.
• Maximum drawdown is 25%.
• Minimum risk-reward ratio is 2:1.

Position Sizing Model

• Use a fixed fractional sizing model.
• Adjust size based on the distance to the stop loss.
• Use 1.5x size for A+ setups.
• Do not scale into trades.
• Scale out at the 2R target.

Trade Filtering

• Avoid trading this setup in a strong downtrend.
• Requires a clear bullish MACD divergence.
• Trade only instruments that show clear momentum shifts.
• Avoid trading this setup during low-volume hours.
• Do not trade in choppy, sideways markets.

Context Framework

• The daily chart should show a potential bottoming pattern.
• Price should be trading near a major support level.
• The setup should occur after a prolonged downtrend.
• The weekly chart should show signs of a potential long-term bottom.

Trade Management Rules

• Move the stop to breakeven after the first profit target is hit.
• Scale out 50% at the 2R target.
• Do not add to winning trades.
• Be patient and let the new trend develop.

Time Rules

• The optimal time to trade this setup is at the end of the day.
• The trade can last for several days to weeks.

Setup Classification

• A+ setup: Clear bullish divergence on multiple timeframes, strong confirmation candle, high volume.
• A setup: Clear bullish divergence, moderate confirmation candle, average volume.
• B setup: Weak divergence, no clear confirmation, low volume.
• C setup: No clear setup, avoid.

Market Selection Criteria

• Trade stocks, forex, and cryptocurrencies.
• The instrument should have a history of respecting momentum indicators.
• The instrument should have a high level of liquidity.

Statistical Edge Metrics

• Expected win rate is 65%.
• Average win is 3R.
• Average loss is 1R.
• Profit factor is 1.95.
• Expectancy per trade is 0.95R.

Failure Conditions

• The strategy fails if the divergence does not lead to a reversal.
• A common failure is a continuation of the downtrend after a brief pause.

Psychological Rules

• Have the patience to wait for the divergence to be confirmed.
• Do not get shaken out by short-term volatility.

Advanced Components

• Use a multi-timeframe analysis to confirm the divergence.
• A volume indicator can help confirm the strength of the reversal.
• Avoid trading this setup on correlated instruments.
• The daily chart must confirm the potential reversal.

Location

• The setup is strongest when it forms at a major support level.
• The setup is weakest in a strong, one-directional trend.
• The location of the divergence in the overall price structure is important.