Who trades using divergence between price and indicator?

This is a discussion on Who trades using divergence between price and indicator? within the Technical Analysis forums, part of the Methods category; Originally Posted by DDI I simply am not getting results. I dont think I'm doing anything wrong. I wait for ...

LinkBack Thread Tools Search this Thread
Old Oct 10, 2007, 10:58pm   #9
fibonelli's Avatar
Joined Oct 2006
Originally Posted by DDI View Post
I simply am not getting results. I dont think I'm doing anything wrong. I wait for the divergence confirmation between price and indicator(MACD or Stoch), followed by a bullish/bearish candlestick formation and then press the trigger. I have more losers than winners.

When I look at charts i see most the big moves had proceded some form of divergence but in practice its not working for me.

Any tips anyone?

A couple of points

i) if you don't apply simple S&R and filter your divergence signals properly you could easily bust your account.
ii) bbmac has clearly illustrated that there are divergences, divergences and divergences
Audere est Facere

"The trend is your friend and divergences are your best friend until the bend at the end"

Party on like it's 1930, until Mr C (Wave) gatecrashes the party.
fibonelli is offline   Reply With Quote
Thanks! The following members like this post: nine
Old Oct 10, 2007, 11:09pm   #10
Joined Nov 2006
DDI started this thread
Originally Posted by fibonelli View Post

A couple of points

i) if you don't apply simple S&R and filter your divergence signals properly you could easily bust your account.
ii) bbmac has clearly illustrated that there are divergences, divergences and divergences
Thanks fibonelli. I think if I had not done a few good trend/momentum trades I would have already blown my account thanks to my bottom/top picking (by using divergences)!!
DDI is offline   Reply With Quote
Old Oct 10, 2007, 11:18pm   #11
nine's Avatar
Joined Sep 2003
Following on what Fibonelli says.

A divergence occurs when price makes new highs and an indicator makes a lower high (nice simple example). For a macd divergence that means that the distance between the fast and slow mas is lower for the second high - this is a simple reduction in momentum (for physicists a loss of measured acceleration). For stoch divergence it means that the close of the high bars in its X (=stoch length) channel is lower in the second case than the first - a reduction in momentum but also takes into account position of close possibly being lower on the bar).

You can go on about how the divergence is constructed but mostly its a reduction in the acceleration of price measured over so many bars (determined by stoch, rsi or macd lengths).

And the question a trader has to ask is "for this contract, does a reduction in acceleration mean that price is likely to reverse?"

Likely is a statistical measure. To answer that question you may need some things to improve the chance of "likely." Some would use support and resistance (could be prior highs or fibs or channels or confluence of these). Some would add a second divergence. Some would say never trade divergence in a break out and run situation. I only use divergence for exits and I watch the current character of the market - some days its exit on divergence, others its exit one peak after divergence. You get the idea.

Nothing in consistently profitable trading is as easy as "got a divergence, got price confirmation, trade it." Good trading requires studying the things you want to trade and really understanding how they fit together. Which is fun (thank heavens)
nine is offline   Reply With Quote
Old Oct 17, 2007, 9:22pm   #12
dentist007's Avatar
Joined Mar 2003
Originally Posted by bbmac View Post
The screenshots show examples of
1. Regular immediate divergence
2. Regular sequential divergence
3. regular hidden/reverse divergence.

My chosen pattern set-up rules in respect of these type of divergences state that my lead oscillator (osma) has to show seperate peak/valley regular immediate/sequential divergence whereas my second oscillator (macd) can show same or seperate peak/valley regular immediate/sequential at the same time.

Insofar as Hidden/reverse divergence is concerned only regular immediate seperate peak/valley will do.

Different indicators, and even the same indicators on different settings will exhibit different behaviour characteristics and it is up to you to find the settings/behaviour characteristics that produce the highest probability patterns/set-ups for your style of trading, proven over any extended sample.

Hope this helps.
enclosed a quick diagram.done by pg dave.this explains the types of divergence.regular sequential not on though
Attached Thumbnails
dentist007 is online now   Reply With Quote
Old Oct 17, 2007, 9:39pm   #13
TWI's Avatar
Joined Jan 2004
14 period RSI divergence is good enough in any time frame
"I refuse to tiptoe quietly through life
only to arrive safely at death"
TWI is offline   Reply With Quote
Thanks! The following members like this post: black bear
Old Oct 28, 2007, 11:03am   #14
dentist007's Avatar
Joined Mar 2003
bbmac: i managed to get the bubble thread on support and resistance from forex-tsd.looks like the thread was pulled by the administrator.enclosed is a copy of what was on the thread
any reason why it got pulled.?
have u got his manual.?
are there any different methods of entry/exit for the different types of trends he describes.ie creeping/normal and blow off
Attached Files
File Type: doc Bubble[1].doc (836.0 KB, 585 views)
dentist007 is online now   Reply With Quote
Thanks! The following members like this post: nine
Old Oct 28, 2007, 9:43pm   #15
Joined Jan 2007
Simple and correct

Originally Posted by TWI View Post
14 period RSI divergence is good enough in any time frame
Hi TW1

Great Post IMO

Simple and effective, I would add for the sake of adding

RSi 5 for weeks but it does not make a jot of difference IMO

Andy AKA
black bear is offline   Reply With Quote
Old Oct 28, 2007, 11:01pm   #16
bbmac's Avatar
Joined Jan 2003
Hi Dentist007

The bubble thread on Forex-tsd certainly appeared to be a good thread with a thorough understanding of peak/trough/supp/res/sbr/rbs analysis. I have no real idea why Bubble deleted it, and I don't have the manual that he is now supplying to the members of his select group of 25 for a fee. Thanks for posting the thread summary here though, I am sure that many should find it useful.

At the time the thread was live, I emailed a trading pal of mine the the link, and indeed posted a link here extolling the thread. I remember thinking that it was the single best and most important thread on the very basics of technical analysis (price action around supp/res) that I had seen on any forum in a long time.

The observations contained in the thread concerning those subjects so closely matched my own (and others) that it helped to clarify my own thinking and the further development of my own trading edge in terms of trend re-entry set-ups in areas of optimum wider importance.

Interestingly Trader_dante has recently commenced a thread here on T2W which is akin to Bubble's thread, talking about finding high probability re-entries to existing trends based around price action and a confluence of trend lines/fibs and ma pullbacks on the Hourly and Daily at identifiable Supp/res areas. He acknowledges the james16 price action and 5min intraday system (ma pullbacks) over at forexfactory as the basis of his own developed methodology, and again, I would commend his thread as one of the best I have seen so far on this whole trend/supp/res/price action subject. (s)

Bubble's descriptions of the types of trend were useful in categorising how a trend behaves at different stages of it's existance. Arguably the 'Blow-off trend' is the most difficult to get involved with because it doesn't pull back into what you may have identified as an area of sbr/rbs, ie in the example of an uptrend, somewhere between the last now exceeded higher swing high and higher swing low, the normal trend effectively pulling back to the higher swing high and the creeping trend to somewhere between.

In terms of high probability entry/exit methods for getting involved in these categorisations of trend are concerned, interestingly I spent a very productivefew days last week in chat with another trader really trying to drill down on the highest probability entry points, so the subject is currently at the top of my agenda.

Firstly I think it is important to identify what type of trend is developing/present on the time frames you trading, and sticking with Bubble's classifications, whether it is indeed a normal, creeping or blow off trend. This is important because it is no good sat waiting for a pullback to the last rbs/sbr that occurs in a normal/creeping treeping trend, if it is a so-called blow-off trend that is developing.

Although I broadly concur with his limited observations on when these type of trends occur, On the lower time frames, I tend to find that it is the creeping trend that develops most. As the trading day develops I make a seperate note of sbr/rbs areas that occur on my intermediate time frame and above and where those areas occur on more than one time frame.

Generally speaking I am looking for 4 distinct technical set-ups involving 1 or 2 band deviation/extreme deviation and hidden divergence in the oscillators on my trigger time frame at an sbr/rbs area on my intermediate time frame+. (What I class as a Reentry type 1, 2 3 or 4.) Should there be a deeper pullback (sticking with the uptrend example) ie price sells through the last potential rbs zone extreme, ie the higher swing low, on my intermediate chart, I will still look to re-enter the trend in the next intermediate rbs zone , so long as that potential rbs zone is coexistent with one on my next/longer time frame. In these situations I am now looking not for hidden divergence in my trigger oscillatios but regular divergence / extremes and now hidden divergence on my intermediate oscillators. Ie I am looking for one of my reversal set-ups to be present on my trigger chart confirmed by a Reentry set-up on the intermediate. (Reversal set-ups I identify are: Reversal type A, type A [ii], type B, type B [ii], type C, Extreme and Extreme [ii.] )

Generally speaking the more time frames that an identifiable sbr/rbs zone exists on, the stronger that zone is likely to be if tested.

Also, the stronger the trend and it's relationship to the prevailing ATR of the instrument you are trading, the greater the chance becomes of a deeper pullback into perhaps an rbs/sbr zone that is identifiable on your longer time frame zone (and others.) If this occurs then I am looking for a Reentry set-up on that time frame confirmed by a Reversal set-up on the intermediate and trigger time frame.

As you know, I tend to use repeatable indicator patterns for a re-entry signal beacuse on these lower time frames, price action can be noisier than say an hourly trigger.

Although my indicator based set-ups present themselves on all time frames, they are just a mechanism for (i) indicating whether any given identifiable level of sbr/rbs may be in play and (ii) fine tuning the entry point.The most important aspects of getting involved with a trend is the identification of price action behaviour around supp/res/sbr/rbs on your chosen time frames.

In terms of other high probability ways of getting involved in trend, the advice would have to find the methodology that is right for you within the broad context of trend/price action and supp/res analysis, and specifically

a. identifying the trend that you wish to become involved with
b. identify the potential rbs/sbr (as appropriate) that exists on that and the time frames surrounding that time frame, ie if thatis your longer time frame, identify the sbr/rbs on the next time frame down, the intermediate time frame and indeed on that itself. Look too within those sbr/rbs zones a identify if there are any signicant supp/res points that exist on the time frames above your longer time frame
c. Find a methodology that works for you to fine tune your entry if such an area is tested, This may be indicator based, or fibs/trend line or price action or a combination of any of those named and more.
I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)

Last edited by bbmac; Oct 28, 2007 at 11:50pm. Reason: spelling
bbmac is offline   Reply With Quote
Thanks! The following members like this post: nine

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Similar Threads
Thread Thread Starter Forum Replies Last Post
Oil Price Sentiment Indicator pssonice Commodities & Money Markets 2 Dec 8, 2006 10:06am
Divergence indicator for Metastock yroyal Trading Systems 2 Aug 12, 2005 9:45am
$300 to $30,000 in six weeks trades using custom '6-x-clutter' indicator Torch Forex 12 May 13, 2005 12:31pm
Divergence fazalv Trading Systems 39 Oct 31, 2003 12:01am
Price/Oscillator divergence turtle trader Forex 3 Oct 15, 2003 7:15pm

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)