Trading MACD Divergence

I wanted to Make a Thread that focuses on Divergence, and to share tips and insight on trade set-ups with each other due to divergence on Macd, Stochastics, Rsi etc..... because im sure its alot we can all learn from each other on this subject and translate that into money because thats what we all want at the end of the day..so thanks for comin by and happy trading.......

Hey grant_thms i was lookin for the thread like this because i think Divergence is very powerful and u can bang major pips when u see a set up how do u trade your divergence?.....

I have been trading divergences successfully in the past. However since this incredible Dollar strength movement. Hourly divergences are not as effective as before.

How are you guys dealing with it at the moment.?

Ive been trading very well because i realize the trend is down due to the major divergence on the daily so im not expecting much in the oppsite direction but im still able to bang good pips

grant_thms,
divergence is strong technical signal. In combination with trend indicators (MA) it can give you profitable trading system. I usually trade divergences in the direction of main trend. In general, combine divergence and some other indicators, and you should never loose. BTW, you can use this free stock screener to find MACD divergences:
http://www.marketinout.com/screens/i...macd_histogram

To truly use MACD, you will need a trending indicator as well. Trading lagging indicators can fail if a trend is over extended. I've met many traders that have made the mistake of trading based off of divergence only to lose profit on a trade.

A trader figures a security is due for a retracement because MACD or Stoch show price in the overbought/oversold area. So, the trader places a sell in the overbought area expecting the price to come down. But it doesn't. Instead the trend continues upward all the while, MACD/Stoch showing divergence is over due. Trader is losing money waiting for a retracement because he/she put way to much stock in trading divergence.

Divergence is a great pchycological indicator for a ranging market but in a trending market, it will always fail. So for divergence traders to protect themselves from MACD/Stoch short comings ... might want to use a trending/leading indicator (momentum, rsi, parabolic, etc) to compliment the lagging indicator.

Summing (or averaging) process equates to integral calculus and causes inertia, or lag. Examples: MAs, Heikin-Ashi candles, longer timeframe candles, P&F charts. The more historical points summed, the greater the lag (and the greater the smoothing effect). Non-linear MAs like Hull, Tillson, Jurik attempt to provide smoothing, while reducing lag and overshoot.

Conversely, taking differences equates to differential calculus and measures rate of change, or acceleration/deceleration. Examples are oscillators like RSI, Stochastic, CCI, Williams %R, Momentum.

MACD is a hybrid indicator. EMA(12) and EMA(26) involve summing, but MACD is the difference between the two, offsetting the lag. MACD signal line is EMA(9) which introduces additional lag, but histogram is the difference between MACD and the signal line, which again offsets it. Consequently MACD histogram performs useful smoothing without lagging price too much.

If price changes direction far enough, the sequence tends to occur as follows:
1. MACD histogram responds first by changing direction
2. MACD itself changes direction
3. MACD crosses its signal line, which always coincides with the histogram crossing the zero line (because of the way the histogram is calculated)
4. MACD crosses the zero line

What you use for your entry signal depends on how early/late you want to enter the move. Earlier generally means higher average win size, but lower win rate (more false signals). Later is vice versa (but too late and you risk missing the move altogether).

Divergence is caused by deceleration in price. Most times you can see this by drawing lines between successive price highs or lows, and observing the change in slope. Example here.
-- If deceleration ultimately results in a decent reversal, entering on the divergence signal will result in a winning trade (depending on how you exit).
-- If the deceleration turns out to be only a lull in the prevailing trend, you will get stopped out, and lose.

Since deceleration must occur before price changes direction, divergence is arguably a ‘leading’ indicator. Stoploss hunts, and/or '1-2-3' patterns at the end of moves, frequently show as profitable divergences (see the above example).

It doesn’t really matter which indicators, if any, you use. Ultimately you must enter on a price bar, and it’s just a question of how early or how late into the move. All indicators are derived from OHLC, and consequently follow price one way or another; mindlessly adding more indicators doesn’t necessarily provide independent confirmation. Indicators are a symptom of price movement, not a cause.

There are really only three types of entries: (1) resumption in a trend following a pullback; (2) attempting to anticipate and fade reversals (top/bottom picking); (3) breakouts. Viewed from first principles, all entries amount to timing variations on one of these themes.

As always, divergence-threads like this pop up at least once every month and the same things are said over and over again;

You cannot or will never be able to trade any divergence alone (profitable) in the long run ! Divergence cannot command the market to follow it's "prediction"

As Hanover says, you can spot divergence on your chart without any indicator, it's simply an occurrence of price slowing down.

Not sure if this has been posted but it shows automaticaly Divergence

The little red and blue arrows on the actual price chart pane tells me when the stochastic comes down from OB and up from OS..

The actual Diversity signal appear in the indicator pane


Have a play

Divergence is a great confirming phenomenon to show that a trend or a move may be overextended, within a strongly trending market. I use divergence not for entries, but for some profit taking (partial exits) if the trade size allows, and the subsequent pullbacks to add to my positions.

Divergences can last for very long periods, with multiple divergences coming in. This only confirms the trend and is risky at best to trade with it against the trend. I will use moving averages, momentum ranges, and divergence to give me more insight as to trend and trend strength. Once a pullback occurs, if a reverse divergence sets up within a range of 3 to 12 bars, the lower being the more reliable, i will use this to get me on in the direction of trend. I have specific targets that i set based on the strength of the signal and will be patient to allow the market to reach them. Once they are reached, I will still alllow a position to continue, but constantly monitor my trend indicators as well as divergences to give me clues as to when to start to lessen my exposures. Also will look for other clues that may lead me to get out alltogether. My initial stops are based on price and momentum support and resistance solely, and the trade will not be taken if the risk reward due to my target levels and stops do not justify the trade.

I consider indicator based divergence in trading decisions. It and price action are the only reliable leading indicators I have found. No, it can't stand alone. It has to be integrated into an approach. When it is, divergence analysis has value (as someone else said, as often to keep one out of a trade as not). I like the CCI and ROC for showing divergence. MACD works well, too, as does stochastic. More importantly, what else do you know about the market you're trading when you use this approach? How do you confirm a divergence pattern is valid? What action to you take and when? Have you sorted out distinct degrees or types of divergence that give you more or less confidence to act or reason to wait? Such questions can only be answered by lots of screen time and study IMHO.

Is there a version of this indicator that doesn't paint. Took a trade based mainly on this indicator. In the morning the market has moved against me and the signal has gone!!!

Any help much appreciated.

Allow me to say, even tough I have taught about it so many time on different forums, the simple appearance of the divergence, hidden or regular, does not guarantees a certain movement in on direction or the other. You have to introduce in your technique another certainly "glue" to assemble the occasion. Hope I made myself clear with that.

dear MACD traders
I have recently worked on MACD divergence and convergence and came into precious points based on elliot waves and fibonacci and trend line and harmonic patterns and been testing the new strategy on demo account for about 6 months.The results were amazing.It will work in any time frame and any situation such as fundemental factors.I have named the strategy as mardsystem and will test it on real account and then will issue the result.my trades will have 10pip SL and 60-70pip TP and in some situations will differ.I think MACD attached to its oscillator origin can be used more reliable than indicators such as stochastic or RSI ,as stochastic have risen many doubts during economical disasters.
This is one one of my trades which SL got hit.Just look at this trade and tell me how could i take profit.but this is before i use my strategy.
I have written this reply to confirm the usefulness of MACD.

Attached Image (click to enlarge)

Like anything when it comes to trading, everything works until it doesn't. Divergence can take your lunch money, even on the best setups with price action. Doesn't scare me away though, Divergence is just one more item to add confluence when taking a trade.

Bearhish Outside bars at swing highs with divergence, but didn't move quite like one would think. ** Even with double divergence.

(ignore the sell, part of a demo trade)
.

I am searching fot such an indicator can you please help me

with regards

Wim Rietveld.

Check this thread: http://www.forexfactory.com/showthread.php?t=49892
or search for "MACD Trad Colored"

hi paulus
I think divergence and convergence cant be simaltaneously drawn in one single chart.you surely know there is settings in MACD properties which let us determine the basic inputs on them MACD will show the chart.for instance if we want to draw true divergence then we will set the settings for close and the same method for convergence.and if we have one indicator then it will give us false positive signals.see the below examples I have changed macd settings. the divergence then fails to make sense.

Hello...I just found this thread and would like to contribute. I am "revisiting" the concept of MACD Divergence after having a lousy first quarter 2011. I believe this concept may help improve my entry techniques. After reading Hanover's contribution I agree with his assessment and have noted many observations. I trade the daily chart (mostly due to time constraints) but am also currently exploring the use of multiple time frames to "fine tune" the entry and increase the risk/reward ratio.

I am currently short EUR/USD after entering on divergence seen on MACD last week. (see attachment below). You can clearly see the divergence in this screen shot along with my entry.

I have noted in my studies that the divergence entry must have a strong follow through in the histogram AFTER the divergence signal or it may fail. This means that I want to see the histogram produce a lower low than the previous histogram low.

So far this hasn't happened. Should the histogram turn positive before making a lower low I may abandon this trade.

Comments? Please be polite and I would appreciate constructive criticism.

Have you quantified how much change the histogram need to produce to be valid as a signal?

OT: Funny, since I haven't heard much talk on FF about MACD histograms, but what you are describing here, is one of the key ingredients behind a system to some of the very few successfully FX traders I know.