☞☞ ☞ ☞☞PRICE to INDICATOR DIVERGENCE☜ ☜ ☜☜ ☜
A very important part of my trading style
to those of prices. When an indicator does not mimic price, it is displaying divergence.
Proper interpretation of price to indicator divergence lets you front run potential reversals which means better entry points.
Note that I see reversals as a matter of course...my T/A bias is always bullish.
Interpreting what indicators are doing relative to prices is what makes them useful.
(either MACD or TRIX can be used...combined with stochastic)
REVERSALS RULE !
To identify divergences, I compare adjacent extremes in the histogram that are on the same side of the study center line. Usually there will be a single move in the histogram bars to the opposite side of the center line in between the adjacent extremes. I've marked these divergences in the study pane of the chart below using aqua, orange and lime diagonal lines with corresponding lines drawn in the price pane for each divergence.
I use MACD or TRIX histograms more so than their plotted moving average lines.
This suggests that the immediately preceding down turn (pull-back) was over-done - so expect the previous up trend to resume.
- Price making HH's while indicators are making LH's -
I define any divergence as the potential for imminent trend change. The difference between these two similarly named types is :
not very reliable at calling a trend change. Comparing statistics, using Reversing divergence as a trading signal for entering short positions
does not work nearly as often as does using Regular divergence signals for entering long positions.
developing when in a long position and may use it as a rational to close the trade.
These examples show how Two Indicator Reversing Divergence is apparent on all three charts.
NOTE: Price did oscillate up and down a bit after the last HH that is marked on the chart. It made a minor LH after that point but did not make a new major LH when you consider what was happening in the overall trend...the last major HL turned out to be at the circled area where price resumed its upward movement.
As I indicated above, PRICE ACTION can be subjective; open to interpretation or to revision as more data and price-bars print on the chart...
Also recognize that Reverse Divergence can follow Regular Divergence. Price action on the chart below was showing a HL while the MACD histogram made an 'exaggerated' LL, indicating the down move was over done...the Stochastic was very oversold too.3/11/2013 3xD divergence FAILED...or did it?
3xD can and does fail to precede directional changes
8/21/2013 ALWAYS Protect Your EQUITY
to the new direction you have...anticipated...
Stop loss orders can help protect against divergence signals that
fail to produce the reversal you have...expected...
It is very easy to get caught up in an adrenaline rush when trading multiple times a day.
You must stay aware of this at all times to avoid over-trading and making poor trades.
You have to continually ask yourself the questions...
Do you trade for excitement or to take money from the market?
Do you feel lucky....Well, do you .........?
Quite a bit of the content that used to be on this page has been moved to
DISCRETIONARY TRADING...INDICATOR SET UP