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Hidden divergence

  • #1,921
  • May 7, 2019 8:46am May 7, 2019 8:46am
EURGBP had bearish HD in H4. MACD entered the trading zone crossing below zero by just one bar and went up. Entry in M5 would have been stopped out. Do you use any filter in H1 for this scenario?
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  • #1,922
  • Edited 12:45pm May 7, 2019 12:04pm | Edited 12:45pm
Quoting rmchokku
Based on Chamane system, I attempted HD bullish trade execution in GBPCHF in demo. D, H4 & H1 are in uptrend. HD bullish divergence noted in H4 (refer I vertical line). MACD crossing zero noted in H1 (refer II vertical line) and entry is in M15 @ 1.3347 (when MACD crossed above zero). Trade was stopped @ 1.3330. Can we make re-entries in M15 as long as MACD stays/crosses above 0 in H1? Would like to hear your feedback on trade execution and understanding of the system. {image} {image} {image}
Hi rmchokku,
I think that you get the idea. But my charts are telling me that it is too early to enter a trade. On my 4HR chart, indicators are just starting to indicate the a HD pattern (horizontal yellow dotted lines). If I go back 1 candle from the vertical line, the pattern disappears. But let's say that there is a HD pattern at the vertical line. Then I switch to the intermediate chart (1 hr). You can see that MACD has not crossed the zero line yet, nor has price crossed the dotted trendline upwards. So for me, it is too early to enter. I would either enter on that timerframe when signals trigger or switch to the 5 minutes for cost averaging, but only if MACD crosses the zero line on the 1HR chart and after the close of the candle. Finally, I think that I would trade on the 1HR TF because of the high spread (7 pips) I get from my broker for this pair, as you can see by the two red and white horizontal lines on the 5 min TF.
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  • #1,923
  • May 7, 2019 12:44pm May 7, 2019 12:44pm
Quoting rmchokku
EURGBP had bearish HD in H4. MACD entered the trading zone crossing below zero by just one bar and went up. Entry in M5 would have been stopped out. Do you use any filter in H1 for this scenario? {image}
You are right, there was an entry signal on the 1 HR chart when MACD crossed the zero line. But then it reversed shortly after and crossed back the zero line upwards. If you put your stop loss at the last swing high, the trade is still open and there is a chance that it will go down if MACD crosses the zero line again on the 1HR chart. There is still a potential second entry because a HD pattern is still valid on the 4HR chart.

A second option is to close the trade after the second cross of the zero line on the 1 HR chart. It would have resulted in a 11 pip loss, which in this case is less than the hit of the stop loss.

The third option would be to switch to the 5 min TF and wait for MACD signals in the trading zone. As you can see, the zone ended very fast and there was no entry signal to the down side. No gain, no loss in that case.
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  • #1,924
  • May 7, 2019 1:03pm May 7, 2019 1:03pm
Here is an example with NZDUSD that I am trading right now. I identified a hidden divergence pattern on the monthly chart (red vertical line) and the start of a trading zone on the Weekly chart (green vertical line and blue rectangle). Using the 4HR chart, I entered a trade in the trading zone after the cross of the zero line by MACD (blue vertical line and down arrow) for a +27 pip gain. Waiting for other entry signals as long as the trading zone is still open.
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  • #1,925
  • May 7, 2019 1:24pm May 7, 2019 1:24pm
Another trading setup with AUDCAD. A HD pattern on the Monthly chart and waiting for entries on the trading zone on the 4 HR chart as long as MACD stays under the zero line on the Weekly chart.
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  • #1,926
  • May 8, 2019 1:10am May 8, 2019 1:10am
Quoting chamane
{quote} You are right, there was an entry signal on the 1 HR chart when MACD crossed the zero line. But then it reversed shortly after and crossed back the zero line upwards. If you put your stop loss at the last swing high, the trade is still open and there is a chance that it will go down if MACD crosses the zero line again on the 1HR chart. There is still a potential second entry because a HD pattern is still valid on the 4HR chart. A second option is to close the trade after the second cross of the zero line on the 1 HR chart. It would have...
Thanks. I drilled down to M5 in EURGBP and saw a signal (first yellow arrow in your screenshot). Entry would have been at the break of low of that candle (0.85392), SL - 0.8550. The trade got stopped. Subsequent to this trade, there was no trading zone & entry.
  • #1,927
  • May 8, 2019 7:12am May 8, 2019 7:12am
Attached is the screenshot of US30 (DJI) index. Hidden divergence in H1, Trade Zone identified in M15 and entry was looked in M5. Once the first entry is made and trade is closed in M5, how should the second entry be made when MACD line does not cross zero level from above?

Second query is on the time compression; Is the above usage of chart timeframes sound ok? Is it acceptable to identify the trade zone in a timeframe that is 4 times smaller but enter trade in a timeframe that is either 8 or 12 times smaller.
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  • #1,928
  • May 8, 2019 7:58am May 8, 2019 7:58am
Quoting rmchokku
Attached is the screenshot of US30 (DJI) index. Hidden divergence in H1, Trade Zone identified in M15 and entry was looked in M5. Once the first entry is made and trade is closed in M5, how should the second entry be made when MACD line does not cross zero level from above? Second query is on the time compression; Is the above usage of chart timeframes sound ok? Is it acceptable to identify the trade zone in a timeframe that is 4 times smaller but enter trade in a timeframe that is either 8 or 12 times smaller. {image}
According to Greene, the entry should be made in a a timeframe 8 to 12 times lower. He even gives examples of timeframes a lot lower than that. In your case, I would suggest using the 1 min or 2 min TF if your trading platform allows it. Using the 5 min TF is not wrong because it follows the principles of a top down approach, but for cost averaging, I would personally follow Greene's advice.

In the trading zone, I wait for every signal in the lower TF, so MACD has to come back crossed the zero line up before initiating another signal to the down side.
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  • #1,929
  • May 8, 2019 8:50am May 8, 2019 8:50am
Quoting chamane
{quote} According to Greene, the entry should be made in a a timeframe 8 to 12 times lower. He even gives examples of timeframes a lot lower than that. In your case, I would suggest using the 1 min or 2 min TF if your trading platform allows it. Using the 5 min TF is not wrong because it follows the principles of a top down approach, but for cost averaging, I would personally follow Greene's advice. In the trading zone, I wait for every signal in the lower TF, so MACD has to come back crossed the zero line up before initiating another signal to...
Very nice well defined method mate. Hands up.
  • #1,930
  • May 8, 2019 8:54am May 8, 2019 8:54am
Quoting chamane
{quote} According to Greene, the entry should be made in a a timeframe 8 to 12 times lower. He even gives examples of timeframes a lot lower than that. In your case, I would suggest using the 1 min or 2 min TF if your trading platform allows it. Using the 5 min TF is not wrong because it follows the principles of a top down approach, but for cost averaging, I would personally follow Greene's advice. In the trading zone, I wait for every signal in the lower TF, so MACD has to come back crossed the zero line up before initiating another signal to...
Thanks Chamane for your support as always.
  • #1,931
  • Edited 10:25am May 8, 2019 9:24am | Edited 10:25am
When evaluating HD, usage of immediate previous high/low in price as well as indicator is what I have done so far. Do you use one or two previous highs/lows although the immediate one does not create HD?

In addition to entry methods we have discussed above which in turn gives top-down approach, what other confluence factors do you use? Striking this for time being as it was briefly answered by Chamane in his initial reply to my post in Page 94. Will reserve this for a detailed future discussion.
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  • #1,932
  • May 8, 2019 10:32am May 8, 2019 10:32am
Quoting rmchokku
When evaluating HD, usage of immediate previous high/low in price as well as indicator is what I have done so far. Do you use one or two previous highs/lows although the immediate one does not create HD? In addition to entry methods we have discussed above which in turn gives top-down approach, what other confluence factors do you use? {image}
I like to pick situations where there is no noise between peaks. In your example, there is some noise, but it is not important, so I would consider it for a good HD pattern, especially because there is a clear trend down. There was a good example of a good HD pattern with no noise between peaks in the preceding uptrend.

Here are confluence factors I often use in a complete top down cost averaging approach:

HD pattern chart:

  1. clear HD pattern
  2. Clear trend
  3. HD pattern shown by more than 1 indicator
  4. Fibonacci tool

Intermediate chart (4-6 times lower):

  1. Cross of MACD zero line (trading zone)
  2. Cross of a support / resistence trendline
  3. Price action (like engulfing candle)

Trading chart (8-12 times lower):

  1. Signals in the trading zone
  2. Cross of MACD zero line

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  • #1,933
  • May 8, 2019 10:55am May 8, 2019 10:55am
Quoting rmchokku
When evaluating HD, usage of immediate previous high/low in price as well as indicator is what I have done so far. Do you use one or two previous highs/lows although the immediate one does not create HD? In addition to entry methods we have discussed above which in turn gives top-down approach, what other confluence factors do you use? Striking this for time being as it was briefly answered by Chamane in his initial reply to my post in Page 94. Will reserve this for a detailed future discussion. {image}
Well said. Got it. Thanks
  • #1,934
  • May 9, 2019 9:15am May 9, 2019 9:15am
GBPAUD in Daily is in bullish trend. Bullish HD noted in H4 but also bearish HD is noted in H1. Also, both divergence are not between immediate highs/lows but one preceding before. Should we avoid trading during such situation as we don't know which one will play out? If you prefer to trade, how do you approach this?
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  • #1,935
  • May 9, 2019 9:30am May 9, 2019 9:30am
Similar to above post, "Nifty IT" index has got regular/classical divergence in Daily and hidden divergence in H4. I avoided taking a trade in either direction due to conflict. Please share your thoughts of approaching this scenario.
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  • #1,936
  • May 9, 2019 9:55am May 9, 2019 9:55am
Quoting rmchokku
Similar to above post, "Nifty IT" index has got regular/classical divergence in Daily and hidden divergence in H4. I avoided taking a trade in either direction due to conflict. Please share your thoughts of approaching this scenario. {image} {image}
Can't you just trade both at the same time? Same system applied, just different timeframes(?)

Sounds weird maybe, but i think if you just apply all the rules, you can trade both timeframes at the same time
  • #1,937
  • May 9, 2019 9:56am May 9, 2019 9:56am
Quoting TheJube
{quote} Can't you just trade both at the same time? Same system applied, just different timeframes(?) Sounds weird maybe, but i think if you just apply all the rules, you can trade both timeframes at the same time
Only what you usually will see, is that not all criteria will be met for bot timeframes at the same time (i.e a trendline break)
  • #1,938
  • May 9, 2019 10:27am May 9, 2019 10:27am
Quoting TheJube
{quote} Can't you just trade both at the same time? Same system applied, just different timeframes(?) Sounds weird maybe, but i think if you just apply all the rules, you can trade both timeframes at the same time
Yes, I can trade both sides but was lost on directional bias. If you have taken both sides in the past, was there any false breakout move issues?

Earlier, I used to enter based on trend line break on price closing outside the trendline. However, after employing the lower timeframe drill down entry method, i'm not using trendline rather would say don't know its combined usage. How do you do that?
  • #1,939
  • May 9, 2019 11:41am May 9, 2019 11:41am
Quoting rmchokku
{quote} Yes, I can trade both sides but was lost on directional bias. If you have taken both sides in the past, was there any false breakout move issues? Earlier, I used to enter based on trend line break on price closing outside the trendline. However, after employing the lower timeframe drill down entry method, i'm not using trendline rather would say don't know its combined usage. How do you do that?
rmchokku,

This is a concern that has been brought to trader's attention in earlier posts in this thread. What I suggest in what seem to be conflict situations between timeframes is to keep it simple and give priority to the higher one. That's what I do anyway. I keep trading the higher timeframes with my usual convergence tools even if there is a contradictory HD pattern in a lower timeframe for the same pair. And if that's the case, a good money management will minimize losses in any event. I think that cost averaging is quite effective for that purpose.
  • #1,940
  • May 11, 2019 4:23am May 11, 2019 4:23am
One of the interesting aspects on relation between HD & Classical divergence got a mention in Martin Pring book. HD often warns of impending trend pullback/reversal. (Refer Martin Pring in his book "Market Momentum" under section "Advance Breakdowns and Breakouts").

Also, you might have noticed that HD comes before classical divergence in a bull to bear market transition and follows it in bear to bull mkt transition.
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