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Hidden divergence

  • #2,881
  • Jan 2, 2020 6:18am Jan 2, 2020 6:18am
Quoting Dfn
HD pattern formed on H1. Unfortunately, on H4 a regular divergence also formed. A contradicting signal. Lets see if the Kijun could hold on H1 and Tenkan could hold on H4. {image}
Price close below the Kijun & Tenken. No Trade.
  • #2,882
  • Jan 2, 2020 6:30am Jan 2, 2020 6:30am
Quoting chamane
{quote} Into the Trading Zone and waiting for long entries. {image}
Hi Chamane,
you prefer to enter based on MACD cross over on 4H or 30M? and based on entry on 30M TF we need to wait MACD signal cross down and enter once crossed up?
If you don't build your DREAM, Someone will hire to help build theirs ...
  • #2,883
  • Jan 2, 2020 6:45am Jan 2, 2020 6:45am
Quoting drsa1970
{quote} Hi Chamane, you prefer to enter based on MACD cross over on 4H or 30M? and based on entry on 30M TF we need to wait MACD signal cross down and enter once crossed up?
Hi drsa1970,

I could have entered at the close of the candle on the 4 HR chart when MACD crossed its zero line. It also coincides with price crossing a resistance level. But I prefer, when I have the time to do it, to wait for entries in what I call a Trading Zone (see blue rectangle). That Zone is valid as long as MACD doesn't cross back the zero line downwards on the 4HR chart. It is like waiting for retracements to enter trades.
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  • #2,884
  • Jan 2, 2020 7:47pm Jan 2, 2020 7:47pm
Quoting chamane
{quote} ROEye, NZDCHF is an interesting case, I will give you my thoughts, others are welcome to do so: I usually consider patterns in higher timeframes to be stronger than the ones in lower timeframes. Here we have a HD pattern on the Weekly chart, which is the highest and it tells us that price has a chance to reverse and go to the down side. That would be in sync with the positions of the two Ki jun lines I use to have an idea of the bigger picture. As a matter of fact, we can see that on the Monthly chart, the trend is down and we are likely...
Yeah, thanks for the explanation. That's what always confused me was where people draw the line as to which divergence (hidden or regular) to put the most value in. Got it as a rule of thumb to take the pattern from the highest timeframe as the starting point. I was just tripping over my shoelaces with mixed patterns on lower timeframes.
  • #2,885
  • Jan 3, 2020 2:37am Jan 3, 2020 2:37am
CAD JPY .

The bottom indi is MACD 8,17,9 EXponential

H12 and H3
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  • #2,886
  • Jan 3, 2020 5:30am Jan 3, 2020 5:30am
Quoting chamane
{quote} Hi drsa1970, I could have entered at the close of the candle on the 4 HR chart when MACD crossed its zero line. It also coincides with price crossing a resistance level. But I prefer, when I have the time to do it, to wait for entries in what I call a Trading Zone (see blue rectangle). That Zone is valid as long as MACD doesn't cross back the zero line downwards on the 4HR chart. It is like waiting for retracements to enter trades. {image}
Two winning entries in the Trading Zone.
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  • #2,887
  • Jan 3, 2020 9:15am Jan 3, 2020 9:15am

  1. HD pattern developing on the Monthly chart.
  2. Regular divergence on the Daily chart.
  3. I missed the entry on the 4 HR chart, but anyway the stop loss at the last swing high would have been too far.
  4. Waiting for entries on the 30 min chart in the Trading Zone.

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  • #2,888
  • Jan 3, 2020 9:30am Jan 3, 2020 9:30am
Another potential entry under a Monthly HD pattern.
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  • #2,889
  • Jan 3, 2020 9:43am Jan 3, 2020 9:43am
Not a typical HD pattern, but valid nonetheless.
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  • #2,890
  • Jan 3, 2020 1:47pm Jan 3, 2020 1:47pm
Quoting chamane
Not a typical HD pattern, but valid nonetheless. {image}
I like this one...I was thinking of this daily breakout whether it is a real one or false break. The hidden divergence on H4 kind of gave it a pre-breakout picture.

So according to your rules Chamane, the H1 MACD cross of Zero validates the signal. Maybe we wait for a breakout of this small H1 Resistance to confirm.

---

Why do you describe it as "not a typical HD pattern"?
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  • #2,891
  • Jan 3, 2020 2:45pm Jan 3, 2020 2:45pm
Quoting mtharwat
{quote} I like this one...I was thinking of this daily breakout whether it is a real one or false break. The hidden divergence on H4 kind of gave it a pre-breakout picture. So according to your rules Chamane, the H1 MACD cross of Zero validates the signal. Maybe we wait for a breakout of this small H1 Resistance to confirm. --- Why do you describe it as "not a typical HD pattern"? {image} {image}
mtharwat,

As the HD pattern is developing on the 4HR chart, a long entry was possible after price crossed the dotted trendline on the 1HR TF. Another possibility was to enter long when MACD crossed the zero line, but it did at the close of a bearish candle. Then we saw the start of a retracement. We can call both situations false entry signals, although price is showing signs of up move with the last 1HR candle being a bullish doji. A third entry technique is the Cost Averaging approach I found in the Gerald E. Greene book. I was actually looking for ways to avoid false entry signals and reversal movements after opening trades. According to that technique, we switch to a 8-12 times lower chart and wait for entry signals as long as MACD is still over the zero line on the 1HR TF. So far, there is no signals on the 5 min. For me, the overall trend is up as we can see price following a channel in the Daily chart.
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  • #2,892
  • Edited 3:58pm Jan 3, 2020 3:41pm | Edited 3:58pm
Quoting chamane
{quote} mtharwat, As the HD pattern is developing on the 4HR chart, a long entry was possible after price crossed the dotted trendline on the 1HR TF. Another possibility was to enter long when MACD crossed the zero line, but it did at the close of a bearish candle. Then we saw the start of a retracement. We can call both situations false entry signals, although price is showing signs of up move with the last 1HR candle being a bullish doji. A third entry technique is the Cost Averaging approach I found in the Gerald E. Greene book. I was actually...

Chamane,

Thanks for your detailed response.

To avoid false entries depends on two factors: 1-a clear PA on those very low time frames you mentioned. Finding the right correction on LTFs and identifying the best logical stop-loss levels. It is the key. Like for example in my EURUSD post, the stop loss would be under the trough not the minor resistance on H1 after the breakout or the M5 trend line you mentioned. Even if the trader encounters losses, his/her overall performance will depend on his money management which will keep him/her in the game or not.
2-some indi confirmations on low to very low time frames which we are experimenting in this thread. (you showed a nice attempt by checking MACD/Zero cross on LTF')

I have not yet delved into the cost average approach you mentioned in the book. I will find it in the thread or I may find the book.

Nevertheless, I advise any divergence trader that it is part of the game to get false entries even with the best PA/divergence setups.
The reason I am enjoying this thread is that I am looking for those confirmations in LTFs by the use of indis in tandem with my most dominant Price Action style of trading. I mostly find divergence on HTF and trade PA on LTF, but an indi confirmation will give an edge.

----------------

By the way Chamane, I can claim I have read most of Dr Elder's Ray books and carefully examined all the divergence setups he commented on. I came to the conclusion that he never uses hidden divergence. He always uses classic/regular divergence (i.e reversal setups). Have you read any of his books? Did you get this impression/conclusion?
Dr Elder has some techniques to use in lower time frames, like for example Force Index, Elder Ray, and he mentions the use of stochastics and others.

----

Currently, I have noticed that most of the divergence traders in this thread and other threads have never discussed the quality of divergence. It is another topic for another organized detailed post I will work on. There are some rules I have gathered from some books here and there. For example:
1-How many minimum bars should separate peaks/troughs to call it a divergence (regular and hidden)?
2-Should a decreasing/increasing value in MACD histogram should be considered? or should we wait for a proper positive/negative histogram? Should it just give us a head-up?
3- IF PA troughs/peaks are on the same level, it is still a right setup but is less strong than if PA itself has significant varying peaks/troughs. Same works on an indicator in relation to price.
4-If there is a divergence against us in the HTF, how to tell if it ended or not? In the case of MACD histogram, is this HTF divergence (that is against us) is clear positive/negative one or just decreasing/increasing bars? If it is a clear one, how to make sure it is over? This on its own is tricky and quite subjective.

Anyway, I am sure you understand what I mean but we leave this part for(scoring divergence) quality for later to help other traders. I have seen a couple of posts in the thread where traders totally miss the quality of divergence and jump on any diversion between price and indi.
  • #2,893
  • Edited 6:01pm Jan 4, 2020 11:30am | Edited 6:01pm
Quoting mtharwat
{quote} Chamane, Thanks for your detailed response. To avoid false entries depends on two factors: 1-a clear PA on those very low time frames you mentioned. Finding the right correction on LTFs and identifying the best logical stop-loss levels. It is the key. Like for example in my EURUSD post, the stop loss would be under the trough not the minor resistance on H1 after the breakout or the M5 trend line you mentioned. Even if the trader encounters losses, his/her overall performance will depend on his money management which will keep him/her in...
mtharwat,

I agree, we will never be able to avoid losing trades, the best we can do is to minimize them. Like the karate grandmaster Kenji Tokitsu once said, the most important thing is not to win, it is not to lose. Like in ''cut your losses short and let your profits run''. I read Elder's work on MACD divergence and I find it very interesting. As I recall, he uses MACD histogram and follows divergence patterns when the peaks and bottoms of the indicator are located on different sides of the zero line. That technique can be another convergence tool, but I do not follow it always. He calls divergence one of the most powerful tool in technical analysis. I don't think he uses hidden divergence patterns. I have most of his books and they are worth reading.

You are right, the quality of the divergence pattern is not to be neglected. I like clear patterns with no noise between peaks and bottoms. The distance between them must not be to small or too big. I use the Stochastic to gage myself and try to pick patterns with distances as close as possible to the settings of the indicator.
  • #2,894
  • Jan 4, 2020 9:18pm Jan 4, 2020 9:18pm
Weekends are for me a backtesting period. Here is an overall winning situation starting with a hidden divergence pattern on the Weekly NZDCAD pair. I am using different settings for MACD. I don't think the settings matter that much especially when I use a Cost Averaging approach in the Trading Zone:

  1. A: the HD pattern was starting to be seen as MACD histogram was exceeding the last swing high but price didn't. That is when I switch to a lower timeframe (Daily) to wait for an entry signal.
  2. B: The signals I usually look for are the cross of trendlines and the MACD cross of the zero line. Neither of them happened till we see the development of a bearish regular divergence pattern. Then I switch to a lower timeframe (4 HR) and wait for an entry signal.
  3. C: A signal occured at the lime vertical line as MACD crossed the zero line. We can enter at the close of the candle, but since the risk would have been more than 2% in my case, I prefer to use the Cost Averaging approach. Instead of an entry signal, it becomes for me the start of a Trading Zone (aqua rectangle).
  4. D-E-F-G: In the Zone on the 30 min chart, there were 4 entry signals given by MACD. Three of them were winning, one losing.

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There are other ways of approaching hidden divergence trading, but the way I do it should give anyone fairly good results.
  • #2,895
  • Edited Jan 5, 2020 12:19am Jan 4, 2020 10:41pm | Edited Jan 5, 2020 12:19am
Quoting chamane
Weekends are for me a backtesting period. Here is an overall winning situation starting with a hidden divergence pattern on the Weekly NZDCAD pair. I am using different settings for MACD. I don't think the settings matter that much especially when I use a Cost Averaging approach in the Trading Zone: A: the HD pattern was starting to be seen as MACD histogram was exceeding the last swing high but price didn't. That is when I switch to a lower timeframe (Daily) to wait for an entry signal. B: The signals I usually look for are the cross of trendlines...
Chamane:

If you are using different MACD settings, then I believe you should use a setting that reflects divergence from the very bottom of a trough/the very top of a peak not a histo bar in the middle of the histogram. I have never seen a divergence drawn from the middle of a peak/trough. Check the first NZDCAD weekly chart.

Change the setting and find a clear divergence.
  • #2,896
  • Edited 1:23am Jan 5, 2020 12:28am | Edited 1:23am
EURAUD
10Hr Chart

There was a bullish divergence that happened before the breakout on Trix lines and histo. However, I am not comfortable with the histo diverging after this breakout. I will wait for a clearer signal after a retest.
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  • #2,897
  • Jan 5, 2020 3:54am Jan 5, 2020 3:54am
Quoting mtharwat
{quote} Chamane: If you are using different MACD settings, then I believe you should use a setting that reflects divergence from the very bottom of a trough/the very top of a peak not a histo bar in the middle of the histogram. I have never seen a divergence drawn from the middle of a peak/trough. Check the first NZDCAD weekly chart. Change the setting and find a clear divergence.
mtharwat,

In realtime, the difficulty is to enter a trade after a divergence is seen between the price and an indicator. On the Weekly chart, the divergence starts to develop at point A. It doesn't mean the pattern is over. Then I check for other entry signals, namely on a lower timeframe. I found a convergence situation at point B on the Daily chart where a regular divergence was spotted. It corresponds to the 50% Fib level on the Weekly chart. Again, point A shows divergence developing, and it also shows the difficulty we have to decide entering a trade or not in realtime.
  • #2,898
  • Jan 5, 2020 5:09am Jan 5, 2020 5:09am
A pair to watch for the next two weeks.
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  • #2,899
  • Jan 5, 2020 5:30am Jan 5, 2020 5:30am
NZDCAD has other potential opportunities to offer. On the Weekly chart, we are still on a Hidden Divergence situation and price is at a 50% Fib level. Switching to the Daily chart, we see a bearish regular divergence pattern and price crossed a trendline. This can be an entry signal, but I am waiting for MACD to cross the zero line... if it ever happens.
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  • #2,900
  • Jan 5, 2020 5:35am Jan 5, 2020 5:35am
A similar situation with NZDCHF.
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