Divergence without the indicator

Hello,

This thread is started because I need some feedback in my research. Maybe it is completely wrong, or stupid or anything - I don't know. All I know is that I did a little research on it and I need some kind of feedback.

The idea behind my research was this:
Divergence with MACD/RSI is pretty powerful and many people use it.
I am a naked trader (no PM's please I already have a girlfriend) and I believe in the concept that indicators only indicate and it is the Price Action that shows the direction to the indicators.

That said, should mean that divergence is occuring IN the price action, so the indicator really isn't needed to be plotted on the chart?

What divergence does is plot MOMENTUM in the movement. Basically it works like this: the price makes a higher high and the MACD does NOT make a higher high meaning that the momentum behind the move is drying up.

My research looked something like this:

If the market moves up (1) and then retraces/corrects (2) and then move up again (3):
if the up-move after retracement isn't very strong, it is a divergence.
What do I mean by 'up-move isn't very strong'?
Basically, that means that the third wave/leg constitutes of reversal candles. (I.e spinning tops, inside candles, pinbars, leaving long tails etc.. Look at the picture). The market is "trickling up" and not a hard, strong move.
Also, if the third leg move up takes allot of time. That also will indicate lack of momentum..





The test was like this:
First: test these rules on a consolidating market 50 times. Calculate how many times it worked/didn't work out.
Second: test these rules on a trending market 50 times. Calculate how many tiems it worked/didn't work out.

So, let's see what the research told us:


Consolidating market:
Worked: 41
Didn't work: 9

Trending market:
Worked: 27
Didn't work: 23


So in a consolidating market it has a working ratio of: 82% and in a trending market the ratio is 54%.

This gives us a clear picture: there is a bigger chance of the market turning on these types of market situations (instability) in a consolidating market than in a trending.
Also, one other thing I noticed is that the times when this worked out in the trending market was when it went INTO a consolidating market.
By that I mean that the market was trending down(or up) and then made a divergence, so it went into a trending market..


Ok so here is a picture of the research in real charts.
You see that the market makes a higher high but the RSI is making a lower high = running out of steam.
What I mean by my research principles: 'trckling up' is what you see on the chart. The market makes a retracement of the first strong move and then makes another leg up.
However, this second leg up has many inside candles, many candles with long wicks, many spinning tops and rounds it all up with a nice pinbar with the lovely pullback.
What I intend to show here is that there is no need for the indicator, the price chart shows this itself with the movement in TIME and also in PRICE (the bars).




I'm just looking for feedback here or maybe new info of some kind that can help me understand PA a little more.
Hopefully someone can help!

Thank you for taking time.

I dunno. Look at this chart--- nice quick movement and yet checkout the three good diverge indys

I like your thinking Carnegie! You're on the right path! PA does rule all and indicators just help you see what you need.

What you see in your small MACD example is price making a higher high yet it's not really a lower high as relative to the past X periods you're looking at in your MACD formula. Seems PA may not be linear as most think it is..

Here's a link that has helped me in dealing with this kind of PA as I can see some of these in your examples.
http://www.fx360.com/techAnalysis/ch...d-pattern.aspx

& a pic that I refer to quite often during these divergence periods.
http://oi52.tinypic.com/2rmxm6t.jpg

10-4 Iamfx.

This should elicit some comments...

I always viewed divergence as a sorry excuse to justify a sorry indy that cannot hit >50% consistently.

Good start. How about another research on Determining Overbought and Oversold Level Without Indicators...I'd like to know this. Thanks

Yes its a good signal when its like that---but my point was that the third leg was quick with little doubt shown by the wicks.
The trouble with regular divergence is that its always CT. Hidden diverge is a better option although regarded as a weak signal by some

Ok, gotcha. Agreed that the normal divergence with empasis on the highs is mostly counter trend, which is still profitable. Ooo I like hidden divergence a bunch! Its another great tool when needed.

Hello Iam fx,

You are very right in this, it didn't work. But I never stated that it would work 100% of the time. I even tried to 50 different times in both markets.

Remember, that we trade differently in each market. So what fits in trending won't fit in consolidating.
But you're correct I agree with you. On this particular occasion it didn't work out.

Thank you for your contribution!!

That's an easy one I would say. Market starts showing signs of INDECISION on the way up or down. Like the last wave in my first picture.


EMERALD: YOU KNOW WE DON'T TALK HERE!!!!!
No, I'm just kidding. I've read about the crab and butterfly patterns but I don't like them.. They feel to complicated and give me a indicator-feeling over it all. I like to see myself what's going on. But we'll talk about that a little more, you seem to know allot more than I about these patterns. Maybe there is something I haven't understood.

Yes, divergence reflects a slowing of momentum in price movement. I've posted on this topic before, e.g. here (see the previous post also), here, here.

What occasionally shows up on intraday (e.g. M15/M30) TFs are pockets of high volume, which can indicate professional activity. A tall, high vol candle followed by zigagging sideways movement, whose candles also show higher than normal volume, can sometimes reflect heavyweight players gradually having their orders filled at optimum prices (i.e. selling into a previously rising market, or vice versa) before they push price in the opposite direction. This can also create double tops/bottoms, hammer/hanging man candles, 1-2-3 or head-and-shoulder type patterns. In the case of 1-2-3 and H&S, connecting successive highs will almost certainly result in lines getting less steep, i.e. a slowing in momentum which will show as oscillator divergence. I posted annotated screenshots in the links above.

Great post. Divergences can be very useful if you know how to use them. Personally i use them near horizontal S/R lines to confirm reversal or retracement. If oscilator doesn't diverge from the price near those lines it means price is gonna break S/R line for some more pips.

One divergence just played out on eur/usd. Price came to resistance line, but there was no divergence, then price broke resistance for 20 pips and made a bearish divergence, that was a sign, and then price got back under resistance and tested it couple of times on lower timer frames, good short entry was on a test of that resistance, and then divergence played out and price fall more than 60 pips and is still falling.

where you able to find this indicator are made any changes and williing to share