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Divergence System by Oleg
of 7
2/2/2016
Divergence Hidden
Super MACD Trader Guide
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D i ver g ence Tr adi ng Patter ns
NQoos ;-) Sheet Music
TRADING NAKED Master M aster your setup. Master Master your Self the interpretation interpretation and ap plication of price a ction concepts
DIVERGENCE [back to Setups] Setups] [NQoos tests Divergence Indicator for Tradestation] Tradestation] [Yahoo post post]] [Traders Dream Method]] Method
tips: Hidden Divergence is the higher % setup, with the trend. Look for price to travel farther when divergence is present. Divergence Articles Articles - Dive Divergence rgence Articl Articlee using RSI Dive Divergence rgence using Stochastic Hidden Divergence Reve rse D ivergence and Momentu Momentum m Trend Dete rm rmination ination pg6 Looking for Divergence Divergence Decisions - Joe Ross Divergence Trading by Buffy trade examples; [0926 09260 03] [080503 080503]] [ 0 [ 0807 80703 03 Bonds and ES ] [examples from rod618 rod618]] [archives NQoos Divergences]] [CCI Divergences [CCI divergence confluent with 162 fib extensions] extensions] [BLine Stochastic Divergence] Divergence] Recommended books: Momentum, Direction, Direction, and Divergence by Wi William liam Blau Blau, Technical Analysis for the Trading Tr ading Profess ional by Constan Constance ce Brown Brown
Divergence is often said to be a leading indicator. Divergence is price action measured in relationship to various various indicators ie. , M ACD, CCI, RSI, R SI, Stochastic Stoc hastic and others or in relationship to another instrument instrument or measure of the market like Tick. There There are 2 basic types types of Divergence.
R e g u l a r
D i v e r g e n c e -
R D
H i d de n
D i v e r g e n c e -
H D
1-Price is making higher highs while the indicator is 3-Indicator is making higher highs while price is not. not 4-Indicator is making lowe lowe r lows while while the price is 2-Price is making lower lows while the indicator is not. not
You will will add a powerful powerful tool to your trading trading style once you have mastered recogniz rec ognizing ing the above 4 relationships relationships between price price and an indicator. indicator.
Here is one of my charts explain e xplaining ing divergence and hidden hidden divergence from divergence few yea backtitle when I Sign from up toa vote onrsthis researched divergence. Useful Not useful gular Divergence aka RD 1. Divergence aka Re gular 2. Reverse Divergence aka Hidden Divergence aka Continuation Divergence aka trend divergence are all names for the same thing.
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Divergence Hidden
Super MACD Trader Guide
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Divergence Trading Patterns
Higher Highs => Short Lower Lows => Long
At first this seemed to me like the opposite of common sense, so I had to think about it for a while. I finally got it that it means when higher highs or lower lows in either price or an oscillator aren't confirmed by the other, then the direction indicated by the extremes, meaning the higher highs or lower lows, is weak and is likely to change. If the higher highs or lower lows are in price but not the oscillator, then the direction of price is likely to reverse. This is regular, or classic divergence and can be used as a confirming indicator for a reversal entry . Regular divergence describes a price trend change that will probably happen in the future, albeit shortly. On the other hand, hidden diverge nce is a confirming indicator of past price direction. We have hidden divergence when we have higher highs or lower lows in the oscillator but not in price. In this case the dire ction indicated by higher highs or lower lows in the oscillator is contradicted by the price trend. Unlike regular divergence, where the weak ness in price tr end is about t o lead to a reve rsal; here the weakness has already led to a little rever sal against the t rend. The hidden divergence implies that this recent little reversal in price direction will be shortlived and that price will resume mov ing in the direction of the tr end. This is exciting because it can confirm a continuation entry , which is generally much less risky than a reversal entry . What you have here is the opportunity to enter on a pullback of the current trend, which you expect to continue based on this and whatever other indicators you choose. This is trading with the trend, nice and friendly; however, please heed the following warning. Warning: I consider divergence to be an indicator, not a signal to enter a trade. It would be unwise to enter a trade basely solely on this indicator as too many false signals are given; however, on the other hand, I consider it even more unwise to trade against this indicator.
Thanks to NQoos for sharing his knowledge in the NQ/ES Paltalk room and providing so many wonderful examples of divergence in his great charts posted at www.dacharts.com. Also thanks to Dave Shedd and Buffy for bringing us all together and for freely and generously sharing their time and knowledge.
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SUMMARY OF FOUR TYPES OF DIVERGENCE
Regular Divergence:
Higher highs in price and lower highs in the oscillator which indicate a trend reversal from up to down. Sign up to vote on this title Lower lows in price and higher lows in the oscillator which reversal from Useful a trend useful indicate Not down to up. Hidden Divergence:
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Divergence Trading Patterns other variations of them that are heard all the time in the NQ/ES Pals chat room. Hopefully, we can clear up some of the confusion so you will be able to add regular and hidden divergence successfully to your trading toolbox. Divergence is a comparison of price to technical indicators. It can also be a comparison to another symbol or spread between two symbols. Divergence occurs when what you are comparing is moving in opposite directions. Divergence can signal an up coming change in trend, a change of trend in progress or that a trend should continue. A divergence signal suggests watching for a trading opportunity in the direction of the signal. Divergences may continue over many swing highs/lows so price action should confirm your trade. This can be done in many ways, some of which are: price making a higher high/low or lower high/low or price testing the last swing high/low, price trading past high or low of previous bar, many of which will correspond with the MACD histogram crossing zero. Divergence trading can be used on many indicators - - Stochastic, MACD, RSI and CCI to name a few. As with most indicators, divergence signals in a higher time frame (TF) are going to indicate a larger move in price. The chart examples are going to be comparing price with the Stochastic and MACD indicators. Each chart has the 50EMA (Blue), 200EMA (Red), 9/3/3 Stochastic and the 7/10/5 MACD histogram on it. There are many other Stochastic and MACD settings that also work for divergence signals. Regular divergence (RD) is best used at the test of a previous high or low, what most traders call a double or triple top/bottom. It is not uncommon to see 3 or 4 higher highs in price in an up trend with 3 or 4 lower highs in the indicator or 3 or 4 lower lows in price in a downtrend with 3 or 4 higher lows in the indicator. This is called 3pt RD or 4 pt RD. This is the indicator telling you with regular divergence that the trend is getting weak and the p otential for a change of trend is there and to trade accordingly. To some traders, it might mean to tighten stops, while others might prepare to exit the trade. Hidden divergence (HD) is best used in trends for continuation trades with the trend. A high percentage of hidden divergence trades will move at least to the last swing high/low, thereby giving you a way to calculate your risk/reward for the trade. If there isn't enough points between the signal and the last swing high/low, then many traders will usually pass on the trade. Another warning to pass on the trade signaled by HD is having RD present for the last 3 highs in an up trend or last 3 lows in a downtrend which is thereby signaling a possible change of trend (COT). Many of you already use regular divergence in your trading. When a fellow trader, NQoos, shared how he used regular and hidden divergence in his trading and posted his charts as the trading day developed, many traders in the NQ/ES Pals chat room became aware of hidden divergence (HD). Regular divergence (RD) used with hidden divergence (HD) can improve your percentage of winning trades. How much depends on your style of trading. As long as price is making higher highs and higher lows, that time frame is considered to be in an up trend. When price is making lower highs and lower lows, that time frame is considered to be in a downtrend.
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The following two charts are an example of regular divergence. Just because we see regular divergence when comparing two highs in an up trend or on a comparison of two lows in a downtrend, it is not an automatic trade. If Unlock full access with a free trial. the trend is strong enough, you may only get sideways price action or a one or two bar retracement before the trend resumes. Regular divergence can be a tool to answer the question of whether the trend is gaining or losing momentum.
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Regular divergence in an up trend (higher highs/higher lows) compares the higher highs in price with the highs in the indicator. Note that both Stochastic and MACD have a lower high while price has a higher high...a signal the trend is getting weak.
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Divergence Trading Patterns Regular divergence in a downtrend (lower highs/lower lows) compares the lower lows in price with the lows of the indicator. Note that both the Stochastic and MACD have higher lows while the price has lower lows....a signal the trend is getting weak. This chart also shows an example of 3pt RD -- each lower low in price has a higher low in the MACD. RD can also have 4pt and 5pt divergence before the trend actually changes.
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Hidden divergence compares the higher lows (HL) of price in an up trend with the lower lows (LL) in the indicator and the lower highs (LH) of price in a downtrend with the higher highs (HH) of the indicator. Hidden divergence helps to answer the question of whether the trend is going to continue. The following chart shows how HD can Download With Free Trial confirm which flags/retracements are the high percentage continuation trades to take. When you draw a trend line (TL) on the indicator you are using, you want the length to match the TL drawn on price on the chart. Note the price action entry for many traders corresponds with MACD crossing zero.
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Another time to look for a divergence is after a period of consolidation or sideways movement in the market that also has a test of a previous high or low in the consolidation range. The following chart shows the benefit of drawing trend lines (TL) as soon as you have the two points to do so (the re d arrows on left). Each touch of the TL by price is a place to check to see what HD is saying. The test of TL by price about 1:30, shows an example of how RD can be a warning that the HD signal, if taken, will not reach the target of the last swing low.
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up to vote cross on this title The following chart shows how to use divergences with trend lines and Sign anticipated MACD of zero at the same time the TL is being broken. Divergence is implying that price will have theUseful strength behind Not it to take out useful the trend line resistance. Notice the setup started in the higher time frame inserted chart. Dropping down to a lower time frame enabled us to have a better entry point with less risk.
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NQoos rules that he uses for divergence trading system along with many chart examples can be reviewed at http://www.dacharts.com/NQoos.php . Remember what all those good books say though, "Each trader should find what works for them." Nothing wrong with taking an idea from here and an idea from there to make your own system. We call that the "trading cocktail" in the chat room. But, that is another article...
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Again NQoos, thanks for sharing your way of trading with divergences with fellow traders NQ/ES Pals chat room! access with a freeregarding trial. this. Also, a big thank you to fellow tradersUnlock for theirfull constructive suggestions The Ensign Trading Tips Newsletter has articles on Stochastic and RSI divergence that are well worth reading. August 2001 November 2001
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Copyright © 2003 - Ensign Software
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