Divergence--untamed beast or man's best friend?

Discussion in 'Technical Analysis' started by thruline, Aug 25, 2005.

  1. thruline


    I've been using divergence to assist reliably in trading decisions. I'm hoping there's sufficient interest here to develop strategies, debate use--when, how, if--to use both regular and reverse (hidden) divergence as part of a profitable method.

    In the attached chart, there are five pairs, each made up of a yellow line and a black arrow. Pair #1 show price rising with indicator flattening. It warns of possible pause or change in trend. Pair #3 shows a double top with a downsloping indicator. Pair #4 confirms likely sell-off with rising price countered by down sloping indicator on higher time frame. Sell at point 4.

    Pair #2 shows upsloping indicator despite lower low in price. At the same time, pair #5 shows price making higher lows while indicator is flat. This reverse divergence on higher time frame complements regular divergence on lower time frame and provides a high probability entry.

    Using several time frames to confirm in these ways greatly enhances the likelihood of an accurate analysis and a profitable trade, provided the divergence is a part of a complete trading plan.

    Any thoughts, methods that others wish to share are welcomed.

  2. Greetings Pat:

    Thank you for posting your ideas.

    Could you tell me which indicator you are using and which time frame is shown in your charts ?

  3. thruline



    I use different ones. The one shown at the bottom in yellow is 'money flow index'. The charts are tick charts. Each bar represents a certain number of transactions. Shorter time frame (on left) is about half the longer (on right).

    MACD sig lines, stochastic, demand indext, TSI, inverse fisher transform and many others all will show divergence in their own way. I think selecting one or several that suit your style and learning their tendencies is a key.

  4. Interesting.

    I specialize in Macd Hist divergences, which don't seem to be very reliable in intraday charts. I position trade.

    I notice the MFI works as a leading indicator also, is this correct ?

    Which future contract are you showing in your charts ?
  5. Hmm. Are you actually profitable trading divergences like that?
  6. Divergence--untamed beast or man's best friend?

    If u donno, u must be a loser.
  7. Sunnyskies:

    I am not sure if you are asking me or not.

    But yes I am profitable. Like anything. Indicators, TA, funnymentals, work for people who learn how to use them properly and obviously are a waste of time for people who don't know.
  8. thruline



    I don't just trade divergence. Tried that a long time ago... ouch.
    I use it as part of a package--an important part.


    That's the Russell. If by leading indicator you mean it sometimes calls next move, yes, actually it does that a lot. The nuance is in determining if it's a smaller or larger move that's coming. Training the eye to see these possibilities on the right edge of the screen takes time. And, again, I don't trade it alone. I look at pivots, other S&R, volume, a longer term stochastic that clues me into possible cycle changes

    I've attached a file from yesterday, before the sell-off that is a good example of using pivots for a continuation and reversal trade.

  9. Divergence is good when you see other things like a defined topping pattern. Trading divergence by comparing two sucessive highs is very unreliable.
  10. thruline


    Here's a chart from today on Russell. These are pretty clear signals on quicker time frame because of choppier market.
    #10     Aug 25, 2005