In theory yes, but trading it simply like that will be a waste of time. There will be times when it works but you'll get killed at other times if all you do is follow it up or down. Just look back and see how well it would have worked in the past.
My take on spread betting,...
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Heres a bit of divergence I noticed recently:
Problem with divergence is that its hard to test and a bit subjective.
Follow Black Swan's advice on a demo account, it will be very educational. Then read another book or two, I'm sure you'll find some good threads on here with suggestions (A Elder is a good starting point)
EDIT: Sorry just realised my line hasn't shown for some reason, look at the MACD histogram in early May compared to during the lower low in June.
Problem with divergence is that its hard to test and a bit subjective.
Follow Black Swan's advice on a demo account, it will be very educational. Then read another book or two, I'm sure you'll find some good threads on here with suggestions (A Elder is a good starting point)
EDIT: Sorry just realised my line hasn't shown for some reason, look at the MACD histogram in early May compared to during the lower low in June.
ULTIMATEONE
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Hey guys
Got some trouble drawing these MACD lines on graphs - i'm just going on previous graphs that have occured at the moment.
Is how I think it is correct? I've seen some sites do the other way around so its leaving me confused!
Uptrend:
Connect the high to a higher high, and you cannot connect to a pin which is lower than the one you wish to start from.
i.e; pin @ 5000 (starting point for uptrend), next pin @ 4950 (you can't place a line for divergence0, the next pin at 5050 is a higher high, therefore you can draw an incline on it and then match the corresponding pins in the MACD to spot if a divergence is occuring.
Downtrend:
Connect the Lower with a lower low, and as in the above example don't draw a potential divergence line if the next pin is higher than the starter pin. If the next pin is a lower low, then connect the two and look at the corresponding pins on the MACD to spot if a divergence is occuring.
Reason I ask is because I see
-some connecting the top peaks(highs) of pins to other top peaks of pins when in a downtrend.
-some connecting the bottom peaks (lows) of pins to other pins that are higher but to their low peaks in a uptrend.
For example;
1
Shows Downtrend being connected by top high their peaks
Shows Uptrend being connected by the bottoms of each pin but at the incline.
2
Shows Downtrend being connected by their Lower Lows
Hopefully someone can help clear up this confusion I have.
Edit: Taking a second look have I got it confused and graph 1 i sjust showing the trend of the graph and nothing to do with the MACD divergence analysing?
Got some trouble drawing these MACD lines on graphs - i'm just going on previous graphs that have occured at the moment.
Is how I think it is correct? I've seen some sites do the other way around so its leaving me confused!
Uptrend:
Connect the high to a higher high, and you cannot connect to a pin which is lower than the one you wish to start from.
i.e; pin @ 5000 (starting point for uptrend), next pin @ 4950 (you can't place a line for divergence0, the next pin at 5050 is a higher high, therefore you can draw an incline on it and then match the corresponding pins in the MACD to spot if a divergence is occuring.
Downtrend:
Connect the Lower with a lower low, and as in the above example don't draw a potential divergence line if the next pin is higher than the starter pin. If the next pin is a lower low, then connect the two and look at the corresponding pins on the MACD to spot if a divergence is occuring.
Reason I ask is because I see
-some connecting the top peaks(highs) of pins to other top peaks of pins when in a downtrend.
-some connecting the bottom peaks (lows) of pins to other pins that are higher but to their low peaks in a uptrend.
For example;
1
Shows Downtrend being connected by top high their peaks
Shows Uptrend being connected by the bottoms of each pin but at the incline.
2
Shows Downtrend being connected by their Lower Lows
Hopefully someone can help clear up this confusion I have.
Edit: Taking a second look have I got it confused and graph 1 i sjust showing the trend of the graph and nothing to do with the MACD divergence analysing?
ULTIMATEONE
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Also how far back to people use their 'starting' point from? i.e; if looking for a decline do you go to the lowest low in the graph or do you go to a pin closer to the actual one moving?
Also do you mark on the point moving or the one before it?
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EDIT
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1) Am I analysing it incorrectly?
or
2) Is this proof that one cannot rely on MACD?
Also looking up PIN bars now, after seeing quite alot especially @ for example 15:00 where it peaked and then dropped.
Also do you mark on the point moving or the one before it?
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EDIT
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1) Am I analysing it incorrectly?
or
2) Is this proof that one cannot rely on MACD?
Also looking up PIN bars now, after seeing quite alot especially @ for example 15:00 where it peaked and then dropped.
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I must say I don't use divergences, but I don't think that would be regarded as one. Usually a divergence refers to new low (or high) 'peaks' in the histogram rather than its slope. Let me quote from Alexander Elder's definition in Trading For A Living
As I've said before I think one of the problems with divergences are they're a bit subjective, and very difficult to test. They're also only really a setup, you need a good entry technique to go with them (I wouldn't just buy at market the moment a divergence looked like it was setting up). I think you're better off looking at some of the other simple ideas already mentioned first.
As I've said before I think one of the problems with divergences are they're a bit subjective, and very difficult to test. They're also only really a setup, you need a good entry technique to go with them (I wouldn't just buy at market the moment a divergence looked like it was setting up). I think you're better off looking at some of the other simple ideas already mentioned first.
Also how far back to people use their 'starting' point from? i.e; if looking for a decline do you go to the lowest low in the graph or do you go to a pin closer to the actual one moving?
Also do you mark on the point moving or the one before it?
----------------------------------------------
EDIT
----------------------------------------------
1) Am I analysing it incorrectly?
or
2) Is this proof that one cannot rely on MACD?
Also looking up PIN bars now, after seeing quite alot especially @ for example 15:00 where it peaked and then dropped.
You are looking too closely and seeing them where they aren't. You are trying to get into the trade too quickly. You must stand back and watch it develop. I'll look at my charts and try to put one on that I think is right--- it will be hindsight, of course.
This is a quick example of what I understand to be digressions. I don't follow them, personally, so there are bound to be better examples. This is an hourly chart and will give you an example of pins, too. As you can see, you have to be selective and they are all so obvious after the event.
My advice? Chuck them out and work with simple averages (to help with trend) and bar patterns.
My advice? Chuck them out and work with simple averages (to help with trend) and bar patterns.
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ULTIMATEONE
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Ah right - nailed it on the head with regards to the trade to quickly I agree, will sit back and observe some more, thanks Splitlink 
Ah right - nailed it on the head with regards to the trade to quickly I agree, will sit back and observe some more, thanks Splitlink
Talking about the pins, they work better if they pierce something that interests you ie. a trend line or average. I've noticd with that chart I posted that they seem to give a good signal with digressions, too. Just a thought.
montmorencyt2w
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That is a very important lesson you (should) have learned .... that it's about more than just technicals. Some here will disagree, but that's my view.
montmorencyt2w
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Divergences
I'm not sure that I've ever seen a theoretical explanation of why or how divergences are supposed to work, for those who believe that they do work, but I assume that what they are trying to do is tell you that a current trend (or current phase of a trend), may be coming to an end. But only maybe. You could also see this by just eyeballing the chart, but again, it would only be a maybe. However, having an indicator tell you gives an impression of precision that merely eyeballing would not do. And perhaps some people are not sufficiently visual in the way necessary to spot it from the chart alone (although personally I find divergences harder to spot than the equivalent on the naked chart).
On that chart of EUR/USD, we can see with hindsight that the upward trend reversed round about the end of 2009, and the divergence appeared to predict this, more or less. I would like to suggest that there were good fundamental reasons for the change of trend, which as we all now know, have been more than borne out by events in 2010.
The down trend appears to have reversed in the last few weeks. I have no idea whether divergence would have predicted this. I don't think it was particularly evident on the naked chart.
The deeper fundamentals also have not changed in my opinion, but fundamentals come at many levels, and it is also the perceptions of the fundamentals that count, sometimes more than the reality. There is in my opinion a temporary optimism in Euroland (or a reduced pessimism), but this will prove yet again, to have been a triumph of hope over experience, and sooner or later, the downtrend will continue.
Now to the OP, people will no doubt tell you not to worry about fundamentals. It is too much for a newbie to take in. In any case, there is no need, because price on the chart tells you everything you need to know about the market. Trade what you see....etc.
The trouble with this approach is that you can be happily trading away, following, say, the downtrend in EUR/CHF, and making a bit of money, and then one day getting blown out of the water when the SNB intervenes. For example.
I am not saying don't learn MACD, or any other indicator, or trendlines, or price-patterns, or channels. What I think I am saying is that if you try to trade while blind (or blindfolded) to the economic and financial background you are not doing yourself and your efforts justice.
Another example: Let's say you had been following the upward trend in AUD/USD in May. On 6th May there was a stock market crash and with it fell AUD/USD. I don't think there was anything on the chart to tell you this, and I doubt if divergence would have helped either. I'm not sure if anyone predicted the crash (I certainly missed it), but I have no doubt there were signs for those in the know.
I'm not sure that I've ever seen a theoretical explanation of why or how divergences are supposed to work, for those who believe that they do work, but I assume that what they are trying to do is tell you that a current trend (or current phase of a trend), may be coming to an end. But only maybe. You could also see this by just eyeballing the chart, but again, it would only be a maybe. However, having an indicator tell you gives an impression of precision that merely eyeballing would not do. And perhaps some people are not sufficiently visual in the way necessary to spot it from the chart alone (although personally I find divergences harder to spot than the equivalent on the naked chart).
On that chart of EUR/USD, we can see with hindsight that the upward trend reversed round about the end of 2009, and the divergence appeared to predict this, more or less. I would like to suggest that there were good fundamental reasons for the change of trend, which as we all now know, have been more than borne out by events in 2010.
The down trend appears to have reversed in the last few weeks. I have no idea whether divergence would have predicted this. I don't think it was particularly evident on the naked chart.
The deeper fundamentals also have not changed in my opinion, but fundamentals come at many levels, and it is also the perceptions of the fundamentals that count, sometimes more than the reality. There is in my opinion a temporary optimism in Euroland (or a reduced pessimism), but this will prove yet again, to have been a triumph of hope over experience, and sooner or later, the downtrend will continue.
Now to the OP, people will no doubt tell you not to worry about fundamentals. It is too much for a newbie to take in. In any case, there is no need, because price on the chart tells you everything you need to know about the market. Trade what you see....etc.
The trouble with this approach is that you can be happily trading away, following, say, the downtrend in EUR/CHF, and making a bit of money, and then one day getting blown out of the water when the SNB intervenes. For example.
I am not saying don't learn MACD, or any other indicator, or trendlines, or price-patterns, or channels. What I think I am saying is that if you try to trade while blind (or blindfolded) to the economic and financial background you are not doing yourself and your efforts justice.
Another example: Let's say you had been following the upward trend in AUD/USD in May. On 6th May there was a stock market crash and with it fell AUD/USD. I don't think there was anything on the chart to tell you this, and I doubt if divergence would have helped either. I'm not sure if anyone predicted the crash (I certainly missed it), but I have no doubt there were signs for those in the know.
Jack Hughes
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Indicators have an uncanny ability to tell you everything once it's happened.
Heres a bit of divergence I noticed recently:
Problem with divergence is that its hard to test and a bit subjective.
Follow Black Swan's advice on a demo account, it will be very educational. Then read another book or two, I'm sure you'll find some good threads on here with suggestions (A Elder is a good starting point)
EDIT: Sorry just realised my line hasn't shown for some reason, look at the MACD histogram in early May compared to during the lower low in June.
Yes, there is divergence there, just as there is on my example. It does not say, however, what is going to happen to the price in the future. These indicators are curiosities and the fact that, when they do not give a correct signal, they are excused by those who follow them as "sometimes they do and sometimes they don't" is not a good argument for using them. Like all indicators, they are treachorous. So are patterns and everything else, I agree, but indicators take up a lot of time and work when the eyeing of a simple bar chart will give a better idea of what has been developing over the recent period.
Youre right, I dont trade them unless they are off support or resistance and even then I am selective. On your chart there is an obvious PIN with divergence although without seeing more of the chart its impossible to say if this was at a S&R level, it worked though. As far as divergence goes that is a perfect example.
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What do you use to select trades?
Jack Hughes
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Charts in different time frames, looking out for trends, microtrends, potential S/R levels, correlations with other markets, etc, etc. I do have MACD, stochs, volume and TEMA on my main chart, but just using one of them to select a trade is doomed to failure.
Most indicators just show price in a different way, which is why they work so well for hindsight trading.
I keep using "digression" when I mean "divergence". Can't get the mistake out of my head. I've corrected one of my posts but I see that I have done it again.
To get back to your post---I'm going to watch that pin and divergence for a while and see if I can get some use out of it.
montmorencyt2w
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Totally agree there, at best divergences are a setup but you still need an entry signal based on some kind of price confirmation (trendline break/MA break etc) with defined risk. In thinking about why they might work, I suppose with oscillators like RSI its indicating that the price movement is continuing (down for example) whilst price is tending to close higher than it was, which is of interest. I am sceptical though, I think divergences are a bit like head and shoulders patterns, obvious after the event but the eye doesn't notice them when they fail. We tend to look for affirmation in charts rather than take the scientific approach which requires us to attempt to negate a pattern or correlation we've found as well.
Alexander Elder wrote about a guy called Fred Schutzman in Entries and Exits who allegedly had found a way to code divergences and had tested them favourably. It was very difficult to code them, but reinforces my belief that any idea we have really needs to be tested, both in the affirmative and negative.
Alexander Elder wrote about a guy called Fred Schutzman in Entries and Exits who allegedly had found a way to code divergences and had tested them favourably. It was very difficult to code them, but reinforces my belief that any idea we have really needs to be tested, both in the affirmative and negative.