Questions on Divergences and Breakouts.

Assume throughout that we are in an up-trend.


Is there any difference between the following two types of divergence:

1)Price makes a higher high, but Stochastics (or RSI) makes a lower high.

2)Price makes lower high, but stochastics makes a higher high.

They are both divergences, just in different ways. Are they exactly the same? Or could there be a difference in subsequent behaviour? At present I have just been considering them as equal, and although I don't trade with this info, I use it as a heads up that things might be changing.

How do others use it? A signal to tighten stops, or to not take trades with the trend? Do they even matter?



The second problem I have (amongst many ) is recognising genuine breakouts. Now I would like to see price burst through a resistance level, and then buy on the pullback to this level. But, often you can see price flying through, and then it retraces quickly to the support level, but that doesn't seem to be a good play to go long there, because it then goes right back down and the breakout failed. It will often go down quite a lot from there. So what filters do people use to recognise a genuine breakout. Sometimes it may seem obvious just from the speed it comes back down, but sometimes it is not so obvious to me. Do you need a bar to both open and close on the top side of that support? Or maybe several bars above, or a move of a set distance from the level?

Calinor said:

Assume throughout that we are in an up-trend.


Is there any difference between the following two types of divergence:

1)Price makes a higher high, but Stochastics (or RSI) makes a lower high.

2)Price makes lower high, but stochastics makes a higher high.

They are both divergences, just in different ways. Are they exactly the same? Or could there be a difference in subsequent behaviour? At present I have just been considering them as equal, and although I don't trade with this info, I use it as a heads up that things might be changing.

How do others use it? A signal to tighten stops, or to not take trades with the trend? Do they even matter?

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1. Price makes a HH - Stoch makes a LH. This is a regular divergence and in this scenario is Bearish. Typically a precursor of trend reversal.

2. Price makes a LH – Stoch makes a HH. This is a Hidden Divergence – also Bearish. More typically at the end of a small rally within an established down trend.

The Bullish flavours are Price making LL and Stoch HL – Regular Bullish Divergence. Usually a reasonable signal of major trend reversal.

Price making HL – Stoch making LL – Hidden Bullish Divergence. Typically at the end of a minor retracement within an up trend.

Calinor said:

The second problem I have (amongst many ) is recognising genuine breakouts. Now I would like to see price burst through a resistance level, and then buy on the pullback to this level. But, often you can see price flying through, and then it retraces quickly to the support level, but that doesn't seem to be a good play to go long there, because it then goes right back down and the breakout failed. It will often go down quite a lot from there. So what filters do people use to recognise a genuine breakout. Sometimes it may seem obvious just from the speed it comes back down, but sometimes it is not so obvious to me. Do you need a bar to both open and close on the top side of that support? Or maybe several bars above, or a move of a set distance from the level?

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What instrument(s) specifically? If you've got volume, it's going to help.

If you don't, then do what the others do, work with S&R, Pivots etc.

Indices or FX, TheBramble, and no volume right now. Although I'm quite happy for people to tell me how they use volume to judge as well, because that isn't obvious to me either. At a breakout there might be an increase in volume, but isn't there also sometimes an increase in volume when the trend ends and reverses? Not sure I understand what you mean by work with S&R and pivots. How do people do this?

Also since I forgot to add it above. If Price makes higher high and stoch just makes the same level (visibly if not exactly numerically), is this a divergence or not?

Calinor said:

If Price makes higher high and stoch just makes the same level (visibly if not exactly numerically), is this a divergence or not?

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Not.

You can just about get away with treating it as a divergence with the Stoch doing its LL/LH/HH/LL if the price is giving you a double-top or double-bottom, but these are probably better traded off the more traditional chart interpretations rather than divergence.

Calinor said:

Indices or FX, TheBramble, and no volume right now. Although I'm quite happy for people to tell me how they use volume to judge as well, because that isn't obvious to me either. At a breakout there might be an increase in volume, but isn't there also sometimes an increase in volume when the trend ends and reverses? Not sure I understand what you mean by work with S&R and pivots. How do people do this?

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Volume. Start (another) new thread on this topic. Please. It’ll get lost here and the big guns would love another shot at going through this one again. I’m quite serious.

Breakouts.

What's your appetite for risk?

If you trade the break of the breakout without waiting for a re-test you do gain the first pips profits and potentially the only pips if it reverses back down into the channel. But you’re more likely to get stopped out for a loss when they do reverse back into the channel, unless you’ve got a really tight stop in place. And if you have, that’s going to limit your profit potential in any case. Especially if you’re trading the noise (less than a 1hr TF).

If you wait for the re-test you’ll have a better shot at profits, but you’ll get less plays and you’ll have given away a few more pips in the confirmation.

Your call.

All of this is madness of course on a 2 min or even 5 min TF btw – nothing makes any sense there except to scalp.

Calinor said:

The second problem I have (amongst many ) is recognising genuine breakouts. Now I would like to see price burst through a resistance level, and then buy on the pullback to this level. But, often you can see price flying through, and then it retraces quickly to the support level, but that doesn't seem to be a good play to go long there, because it then goes right back down and the breakout failed. It will often go down quite a lot from there. So what filters do people use to recognise a genuine breakout.

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trade 3 lots/cars/contracts
close first at + tiny profit (to cover transaction costs)
close second at + little bit of profit
bring Stop to breakeven minus tiny

price can roll over time and time again. as long as you have a) covered your costs and b) preferably made a wee bit of profit you can take these "scratch" trades all day long until a "runner" kicks in, ie genuine breakout