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Trading MACD Divergence

  • #21
  • Mar 14, 2011 8:02am Mar 14, 2011 8:02am
Quoting aediaz1
Have you quantified how much change the histogram need to produce in order for 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.
I made some studies and observations regarding the histogram. While I cannot put a "quantifiable" number on the follow through, I do want to see that the histogram creates a greater peak than the previous peak (in the same direction). I have posted the below screen shot to illustrate (this is from my notes on my studies).

The basic sequence is this:

  1. Look for divergence using the MACD Line
  2. Enter when histogram begins to converge AND give a tradable price action signal
  3. Check to see that the follow though on the "new" direction creates a new peak
  4. Hold until opposing divergence emerges


Does this answer your question?

Attached Image (click to enlarge)
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  • #22
  • Mar 14, 2011 8:49am Mar 14, 2011 8:49am
Quoting gspajon

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

I just took a look at your chart and your strategy. I understand what you are trying to do, but, maybe you should consider waiting for the market price action to confirm your strategy first. Let me explain.

If you take a look at your up-trend trend lines, you will see that the longest one was only closed under once, but just barely. The very next day it closed above the trend line. That's market indecision. No confirmation on it breaking lower. Instead, it's moved higher. You have drawn a second uptrend line, which is good. But, it's still an up-trend line. You do not have a bearish moving average cross yet either. Still bullish. All the market swing lows are still higher than the previous swing lows. Your trying to sell a current up-trend. Why? Obviously, the momentum in to the upside!
Your indicator is simply telling you that the momentum is losing it force, but do not mistake that for a sell signal! Just because the indicator says divergence does not mean the market will turn at that given time! It simply means it may be losing momentum. It can certainly still move higher, it just may take more time to do so then in the previous upswings.
Let me put it to you another way, If you was long from a lower price and have a winning position right now, if you read your own charts do you see any technical reasons to be getting out of that trade?
Are there any reasons on the chart to say the trend has changed?
I think the answer is obvious! NO! the euro is in an uptrend at the moment until market price action has proven otherwise! You must always follow and not anticipate to be successful in the long run! Stop anticipating! And simply follow!

Now that we understand that, we can look for confirmations of what your indicators are saying. Maybe we wait for a break of an uptrend line, trade down, then wait for it to retest that trend line and start moving lower again before we sell! Let the market tell you what to do. But first, let the market confirm to you what the indicators are pointing to.

Follow, don't anticipate!
  • #23
  • Mar 14, 2011 9:36am Mar 14, 2011 9:36am
Hi SatchFan,

Thank you for your response. I absolutely understand what you are saying and it underscores the difficulty I've been having over the past several years. Simply put is this: By the time I wait for any type of confirmation or trend change to occur, I've missed the boat and am now stuck with "chasing" the trend.

No one that I am aware of can say with any kind of confidence what will occur in the future. My way of looking at this business has changed slightly. I now find that I look for potential opportunities, and then enter and control my risk. I understand that anticipating is dangerous, however, my study has shown, that MACD divergence is extremely reliable, and in order to be fully exploited, will require counter trend entries. That is why I have devoted more time to learning what patterns emerge in FAILED signals.

Thus my concern over the current position as it seems to be following the "failed signal" pattern. However, I've found that the majority of the most profitable entries initially occur as counter trend signals. and by waiting for moving averages, or trend lines, or (name your trend indicator) to show a trend change, is generally WAY too late.

I consider myself a longer term trader and do not enter and exit intraday (unless its to fine tune an entry). So by waiting for a change in MA's for example I have missed the first 500-700 pips in a 1,300 move.

Conversely if my trade does lose, I've lost 70-150 pips, on those time when divergence fails. I consider those acceptable odds.

I agree with your assessment that the EUR/USD is currently in an up trend and am currently holding a long position as well, however I am seeing signs of trend exhaustion (as indicated by divergence and price action - for confirmation). I am alert to the possibility of trend continuation but still feel that (in the short term at least) the EUR/USD may be headed lower...unless of course my "failed signal" pattern completes...them I'm out and will continue with the long position.
  • #24
  • Mar 14, 2011 10:18am Mar 14, 2011 10:18am
According to Martin J. Pring 1997, sometimes, the reverse divergence patterns develops in a trading range environment as following. The issue is these patterns is uncommon if compare to regular and hidden divergence.

Occasionally, a reverse divergence develops while the market is in a trading range. Here, the price is trading up against a resistance trendline, and each peak is at the same level. However, the oscillator is not constrained by a horizontal trendline and makes a higher peak toward the end of the trading range. This type of reverse divergence is typically followed by a trend reversal.

Attached Image


During a bottoming process, a reverse divergence occurs when the price keeps falling to the same level of support, but somewhere along the line, the oscillator falls to a new low.

Attached Image
  • #25
  • Mar 14, 2011 10:23am Mar 14, 2011 10:23am
Quoting gspajon
Hi SatchFan,

Thank you for your response....
So do you think that maybe looking for ways to add to winners or enter into the trend (buying dips in and uptrend and selling rallies in a downtrend) might be more profitable in the long run instead of trying to pick tops and bottoms in a market? After all, you would be not missing out you would be trading with the trend.... You could still use your divergence indicators but looking for dips to buy in an uptrend that have divergence. And vice versa.
Have you been adding to winners? You should click on the link in my signature and give it a read and let me know if it opens your eyes to a new way of thinking and trading.

Peace,
SatchFan
  • #26
  • Mar 14, 2011 11:23am Mar 14, 2011 11:23am
Quoting gspajon
Hi SatchFan,

Thank you for your response. I absolutely understand what you are saying and it underscores the difficulty I've been having over the past several years. Simply put is this: By the time I wait for any type of confirmation or trend change to occur, I've missed the boat and am now stuck with "chasing" the trend.

No one that I am aware of can say with any kind of confidence what will occur in the future. My way of looking at this business has changed slightly. I now find that I look for potential opportunities, and then enter and...
hello gspajon,

in my long-term trades like daily I use a similar strategy with macd, thank you for sharing. I have 2 questions :

a) what made you decide to use these macd settings and not the standard 12,26,9 ?

b) have you tried optimized macd indicators, many traders say that MT4 macd is not very reliable.

c) why did you take your short so early, wouldn`t it be better to wait for a second lower high on the daily to clearly form ?

Thanks, if you do find time plse share your indies and template. I can also provide indies such as RSI, which has been for a very long time my alternative to macd.

My best wishes,



____________
michael
Be like water.
  • #27
  • Mar 14, 2011 12:25pm Mar 14, 2011 12:25pm
Quoting msmarple
hello gspajon,

in my long-term trades like daily I use a similar strategy with macd, thank you for sharing. I have 2 questions :

a) what made you decide to use these macd settings and not the standard 12,26,9 ?

b) have you tried optimized macd indicators, many traders say that MT4 macd is not very reliable.

c) why did you take your short so early, wouldn`t it be better to wait for a second lower high on the daily to clearly form ?...
msmarple...

the indicator I use on metatrader 4 is freely available at: http://codebase.mql4.com/ru/source/12904. There's nothing special about it at all. I only plugged in the moving averages that I use on my charts which are 8, 21, & 55 EMA's I use these moving averages because each is a Fibonacci number and I have had good results using these for trend...etc.

The settings on the MACD are 8, 21, 5. Why? These too are all Fibonacci numbers and when I studied these settings over the past several years I noted that these setting seemed to align very closely to what price was doing in real time. As far as optimizing goes, I try to stay as far away from that as possible. I tend to unconsciously "curve fit" indicators even when I'm not trying to...back tests are GREAT...real time is something else entirely.

My goal in this most recent study was not necessarily to find what signals were right but what patterns emerged when the signals failed. It is easy to look at a chart in retrospect and tell when and where to trade. However real time analysis rarely mirrors static backtesting. So I decided to look at what a signal does when it starts to fail. That way I can save a few pips exiting a languishing trade while also allowing the winners to continue when no failure sign is present.

I went short on this signal because I saw clear divergence between the MACD lines and price action. A short entry signal presented just as the histogram on this divergence signal began to converge. I entered and at one point was positive about 200 pips or so. However, as time as progressed it appears this signal may fail, in which case I'll lose about 0.08% (8/10 of 1%) or less.

However the jury is still out. If this signal does work out it has the potential to gross 2-5%. A worthwhile risk/reward.

Why not wait? Because I am aiming to catch new trends AS they begin and maximize the profit. If I control the loss it seems an acceptable risk compared to the potential profit. As well, I am tired of chasing trends after they are well established. I have been chopped up, chewed up, and spit out. I would much rather take few trades and control losses than more frequent trades and small profits. Small profits that disappear in the inevitable trend change/consolidation cycle.

One final note worthy of consideration. I do NOT expect a trend change to occur in a day or even a week. I fully expect to hold these positions for months. If you refer to the chart I posted early on trend change the actual change (as measured by MA's or Trend Lines) took more than a month to occur. Meanwhile I held a trade during all the consolidation non-sense and avoided getting chopped up as well as losing numerous intraday trades.
  • #28
  • Mar 16, 2011 9:15am Mar 16, 2011 9:15am
Today's price action has produced bearish divergence on the 4 hr chart embedded within today's (3-16-11) candle. While at the same time the daily chart price action is now aligning itself with the bearish sentiment on the MACD. Both are sloping downward, and yesterday's hanging man shows growing bearish sentiment in price action. There seems to be fairly strong resistance in the 1.4000 area.

I would conclude a hold on my short from last week.
Attached Image (click to enlarge)
Click to Enlarge Name: eur-usd 3-16-11-day.gif Size: 37 KB
  • #29
  • Mar 23, 2011 7:51pm Mar 23, 2011 7:51pm
Divergence on this pair is continuing and providing another (counter trend) entry opportunity
Attached Image (click to enlarge)
Click to Enlarge Name: 3-23-11 bearish engulfer-entry.gif Size: 30 KB
  • #30
  • Mar 24, 2011 4:19pm Mar 24, 2011 4:19pm
Below shows a strong bearish close below the low of yesterday's bearish engulfing bar. Parallel trend support lines also line up with 55 day EMA (in blue) and the monthly trend resistance line (now acting as support).

A sustained break through this area will signal a change in trend. MACD is now showing a bearish cross and building further bearish sentiment.
Attached Image (click to enlarge)
Click to Enlarge Name: 3-23-11 bearish engulfer-confirmation.gif Size: 31 KB
  • #31
  • Apr 5, 2011 5:23pm Apr 5, 2011 5:23pm
The below chart shows significant divergence on MACD with a corresponding drop in bullish force leading me to believe the EUR/USD may be forming a short term top. I am not short yet however, as I am waiting to see a price action reversal signal, like a dark cloud, or bearish engulfing bar to form the final piece of the puzzle.

Counter trend?? yes I know, but worth a look. The real question is will the signal form before, after or during, the Eurozone rate announcement tomorrow?

comments?
Attached Image (click to enlarge)
Click to Enlarge Name: EUR-USD-12 hr stalking entry.gif Size: 32 KB
  • #32
  • Edited 9:18pm Jun 25, 2011 8:18pm | Edited 9:18pm
Quoting Jhig
Divergence is a great pchycological indicator for a ranging market but in a trending market, it will always fail.
Look at 6/22/2011 AUD/USD at 16:00 on the 15m for a failed divergence in the middle of that long decline, when the stochs were showing oversold. If one would have sold this after it failed until the 56, 6 stochastics began to turn up past 20, there would have been 100 pip gain. Usually it's a bad idea to sell into oversold stochastics, but here it was like a levee breaking.

I haven't noticed this failed Macd divergence in the middle of a long trend before, but it's interesting. It may be a buy signal in the direction of the trend when it happens, though I am not sure of the average pip gain of so doing.

To clarify, I just mean the negative bars getting lower while the price declines as well, not the more common bar heights from two different swings.
  • #33
  • Dec 7, 2011 2:43pm Dec 7, 2011 2:43pm
Divergence is a strong indicator, and MACD divergence is among the most popular divergence tools used. But to successfully trade divergences, it is essential to first define the broad trend, and then after a pull-back or range, use the divergence signal to trade in the direction of the major trend. Timing the entry is a constant source of confusion in divergence trading. Whenever there is a signal, i switch to the lower time-frame, and then wait for a break of the pivot low, or pivot high, whichever is applicable, to enter the trade. By using this approach, i also get a very good stop-loss point, just below/above the opposite pivot.
  • #34
  • Dec 13, 2011 1:46am Dec 13, 2011 1:46am
Divergence is not a single super tool but sure it is something to keep an eye on...
Attached Image (click to enlarge)
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  • #35
  • Jan 19, 2012 4:32am Jan 19, 2012 4:32am
Quoting Rico_Gonza
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

Hi, thanks for pointing me in this direction - but does this screener identify divergences in other oscillators such as RSI etc.?
  • #36
  • May 8, 2012 5:24am May 8, 2012 5:24am
Quoting devshishya
Hi, thanks for pointing me in this direction - but does this screener identify divergences in other oscillators such as RSI etc.?
RSI and MACD Divergences can really be effective but one should take into account trend strength and support/resistance levels in combination with them.
  • #37
  • Jul 10, 2012 6:55am Jul 10, 2012 6:55am
Quoting devshishya
Hi, thanks for pointing me in this direction - but does this screener identify divergences in other oscillators such as RSI etc.?
You should determine divergences by price trends and by RSI contr-trends. The point is that the market shuold be in trend and the divergence is recognized on a minor correction to the main direction.
  • #38
  • Mar 17, 2013 2:51pm Mar 17, 2013 2:51pm
have learnt alot on this short thread. thanks guys
"Taking Responsibility is The Cornerstone of A Winning Attitude"
  • #39
  • Apr 7, 2014 5:48pm Apr 7, 2014 5:48pm
Quoting Libra
have learnt alot on this short thread. thanks guys
Agree with you Libra. Studying this more.
  • #40
  • Last Post: Aug 19, 2020 8:53am Aug 19, 2020 8:53am
Quoting LasVahGoose
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) . {image}


Hi Las, I couldn't find this indicator. I looked everywhere, you provided a link below for another chat and it wasn't there
where do I find it ? most indicators give Divergence signals for the histogram not the EMAs
Help please.
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