MACD and PRICE divergence

The problem with divergences is they can come in two's, three's etc, so it is not foolproof. It is one of my main tools on the Es though. The settings are not crucial. I use the defaults. The key however is that a divergence alone is not a signal. It is more accurately described as a condition. You need a trigger, typically the break of a trendline or MA, to get you in the trade. If price fails to stay above the trigger (if long), I would think hard about bailing.

You will need another tool to take profits, because you usually would not see a divergence on the other end of the run.

Another problem with trading divergences and the reason it is helpful to use price targets, is that you usually will see a divergence in the direction of the trend. In other words, a divergence trade usually is counter-trend, or reflective of a trend change.

 

Here is my AFL code for MACD-Price divergence.
Excellent entries/exits when available.
The combination with the respective Stochadtic Divergene is true gold for Crude Oil futures.

//MACD-Price divergence, by D. Tsokakis
ST33=MACD();bars=100;d=5;
TR1=LLVBars(ST33,d);
COND1=TR1>0 AND Ref(TR1,-1)==0 AND Ref(ST33,-1)<0;
TR2=IIf(COND1,Ref(ST33,-1),0);
Plot(st33,"MACD",1,8);
M1=ValueWhen(COND1,ST33);
P1=ValueWhen(COND1,LLV(L,3));
DM1=M1-Ref(M1,-1);DP1=P1-Ref(P1,-1);
DT=Ref(BarsSince(COND1),-1);
POSDIV=DM1>0 AND DP1<0 AND DT<BARS;
Plot(POSDIV*LastValue(Lowest(ST33)),"",5,2);
TR11=HHVBars(ST33,d);
COND11=TR11>0 AND Ref(TR11,-1)==0 AND Ref(ST33,-1)>0;
TR21=IIf(COND11,Ref(ST33,-1),0);
M11=ValueWhen(COND11,ST33);
P11=ValueWhen(COND11,HHV(H,3));
DM11=M11-Ref(M11,-1);DP11=P11-Ref(P11,-1);
DT1=Ref(BarsSince(COND11),-1);
NEGDIV=DM11<0 AND DP11>0 AND DT1<BARS;
Plot(NEGDIV*LastValue(Highest(ST33)),"",4,2);
GraphXSpace=5;

 

You may also have it for free and do something better with these $4,000. BTW, you can make more than $4,000 from the divergence alone, it is one of the best T/A tools ever met.

 

How are you defining "divergence"?

 

What is AFL code used in?

 

http://www.amibroker.com/

 

Ya, in a flat market div works great. But, if you find yourself in a trending market, you best get prepared. Having five, six or seven losses in a row is not uncommon.

 

Most traders I know define it as Price making a higher high or lower low, and some corresponding indicator (RSI, Stochastic, MACD...etc) making a Lower high or Higher low.

You should be able to find plenty of info doing a google...

 

AFL is the acronym of Amibroker Formula Language.

 

Someone mentioned using divergence on a timeframe less than 5m not working. I use it on a 1m and it works for me.

Also, I think it was Ditch that said something about divergence trading being a road to the poorhouse.
Again, it works for me.

Many traders will mention that some kind of trading tactic, info, indicator, timeframe,etc should have no place in trading.

In trading, like many things in life, there are bits of information that are meaningless to some and a piece of gold to others.

When you have divergence between price and your oscillator, just look for something else to make sure this is and actual reversal and not just a pause that does not have enough move to gain any profit. For example a major support or resistance point. And on that note, of course the beauty of trading is, even if you have the extra umph of a S/R along with divergence, you still don't know if there will be a pause or actual reversal. Put as many odds in your favor as you can.