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A New Look At Divergence

  • #1
  • First Post: Oct 23, 2011 8:21pm Oct 23, 2011 8:21pm
I've been playing with this most of the day and it looks really good.

Capito has a thread running using Sig Trader's currency indexes. That is where I learned about them. I couldn't keep up with his method because the rules seemed to change every day, but it introduced me to the indexes.
http://www.forexfactory.com/showthread.php?t=317893

I don't know exactly how these indexes are derived, but they show charts of the individual currencies.

There is a EURLFX, GBPLFX, AUDLFX etc.

Below is a screen shot of the EURRLFX (Top) vs the EURUSD (Bottom).
This is using the 15M TF, but any TF can be used.

The red trend lines show the divergences. The white arrows show the direction of the trade. All the trades are placed on the EURUSD. The indexes can be traded but they have something like a 20 pip spread.


I have three winning trades running that I placed tonight. All were obvious divergences.

EURLFX - EURUSD
AUDLFX - AUDUSD
NZDLFX - NZDUSD


Looking back on the charts, there are very few losers.

I would place a SL below/above the nearest swing low/high. TP would be equal to the SL.
Attached Image (click to enlarge)
Click to Enlarge Name: eurdiv.jpg Size: 220 KB
  • #2
  • Oct 23, 2011 8:54pm Oct 23, 2011 8:54pm
how you confirm a divergence? cause it's very lot fake

you mean that eurlfx have korellation with eurusd ?? it must have the same divergence before op
  • #3
  • Oct 23, 2011 8:55pm Oct 23, 2011 8:55pm
Quoting dashboard
how you confirm a divergence? cause it's very lot fake
What?

I confirm divergence with my eyes.
  • #4
  • Oct 23, 2011 9:47pm Oct 23, 2011 9:47pm
Here are screen shots of the AUD and NZD trades I took tonight.

You can see the EURUSD in post 1.

All three are in profit as I post this.
Attached Image(s) (click to enlarge)
Click to Enlarge Name: auddiv.jpg Size: 225 KB
Click to Enlarge Name: nxddiv.jpg Size: 226 KB
  • #5
  • Oct 23, 2011 9:55pm Oct 23, 2011 9:55pm
Capito should certainly be congratulated for making so many of us aware of the Index's. As this thread shows, many people are thinking about ways that this information is able to be used to provide us with edges.

I was not initially happy with the idea that divergences per se would provide an edge in this case so I gave it a bit of thought.

Basically using divergence in this way as an entry - you are trading a pivot after a period where the index moved further or less than its 'major' pair. The crutial point is that there is a very strong correlation between a currency index and its major pair (obviously) and you are taking a trade after two correlated markets have deviated from their usual tight correlation.

The momentary lack of correlation is (again, obviously) just the movement in USD in relation to the other currencies in the index, but it is at the same time reflective of good momentum in USD market. Without good momentum in USD, we would not expect the lack of correlation to be sufficient to produce a noticeable divergence between the markets.

So we would be trading a price pivot that is confirmed across the most traded currencies (ie the Index), during a period of proven momentum in USD.

It might just work Billbss.
Enter Signature
  • #6
  • Oct 23, 2011 10:06pm Oct 23, 2011 10:06pm
Quoting Sarythsaya
Capito should certainly be congratulated for making so many of us aware of the Index's. As this thread shows, many people are thinking about ways that this information is able to be used to provide us with edges.

I was not initially happy with the idea that divergences per se would provide an edge in this case so I gave it a bit of thought.

Basically using divergence in this way as an entry - you are trading a pivot after a period where the index moved further or less than its 'major' pair. The crutial point is that there is a very strong correlation...

It seems to work.

Set up a couple of charts, scroll back and take a look. EUR, AUD and NZD seem to show the most correlation with their USD pairs. GBP - not so much.
  • #7
  • Oct 23, 2011 10:49pm Oct 23, 2011 10:49pm
I've also read through capito's thread billbss and am inspired by your creative thinking re:divergence. I, like you have profited nicely on this trade, pre-European Open! Your thread will have my attention...

(no index chart posted-I am at a different computer)

Pete

Attached Image (click to enlarge)
Click to Enlarge Name: Capture.PNG Size: 36 KB
  • #8
  • Oct 23, 2011 11:14pm Oct 23, 2011 11:14pm
Thanks Billbss. Please can you attach the indicater if possible.
  • #9
  • Oct 24, 2011 3:55am Oct 24, 2011 3:55am
Quoting goldfinger
Thanks Billbss. Please can you attach the indicater if possible.

There is no indicator.
  • #10
  • Oct 24, 2011 3:58am Oct 24, 2011 3:58am
Here is another trade and another winner.
Attached Image (click to enlarge)
Click to Enlarge Name: aud2.jpg Size: 209 KB
  • #11
  • Oct 24, 2011 4:20am Oct 24, 2011 4:20am
Quoting billbss
Here is another trade and another winner.
Hi Billbss

when a divergence is indicated, which direction do you trade in? Do you follow the direction of the index or the pair you are trading. Looking at the charts you posted, it appears to be sometimes the one, other times the other. Is there some other criteria to be considered for direction of the trade?

Thx
  • #12
  • Oct 24, 2011 5:09am Oct 24, 2011 5:09am
Quoting billbss
There is no indicator.
I mean the index (flx) .
  • #13
  • Oct 24, 2011 5:17am Oct 24, 2011 5:17am
how do i pull up a XXXLFX chart in MT4
  • #14
  • Oct 24, 2011 5:44am Oct 24, 2011 5:44am
Quoting msood
Hi Billbss

when a divergence is indicated, which direction do you trade in? Do you follow the direction of the index or the pair you are trading. Looking at the charts you posted, it appears to be sometimes the one, other times the other. Is there some other criteria to be considered for direction of the trade?

Thx
If the peaks diverge, it is a sell. If the valleys diverge, it is a buy.
  • #15
  • Oct 24, 2011 5:51am Oct 24, 2011 5:51am
Quoting 33drifter
how do i pull up a XXXLFX chart in MT4

Go here http://www.liteforex.com/downloads/mt4/ , open a demo account and download the MT4.

This MT4 has the XXXLFX indexes.
  • #16
  • Oct 24, 2011 6:11am Oct 24, 2011 6:11am
Quoting billbss
Go here http://www.liteforex.com/downloads/mt4/ , open a demo account and download the MT4.

This MT4 has the XXXLFX indexes.

Still no luck, am i doing something wrong?
Attached Image
  • #17
  • Oct 24, 2011 6:16am Oct 24, 2011 6:16am
Right click on the market watch window and select "show all" it should then show you the indexes.
  • #18
  • Oct 24, 2011 6:27am Oct 24, 2011 6:27am
Quoting ohammond
Right click on the market watch window and select "show all" it should then show you the indexes.
Perfect
  • #19
  • Oct 26, 2011 1:13am Oct 26, 2011 1:13am
I thought this method has merit - so i am wondering why it died so quickly and was moved to discussion thread???
Enter Signature
  • #20
  • Nov 18, 2011 8:44pm Nov 18, 2011 8:44pm
Hi Bill. I noticed your thread some time ago and while I am mainly a PA (HL and LH) type of trader, thought I would take a look at this type of divergence.

I only trade the first few hours of the London session but over the past few weeks have taken 8 divergence trades on the M15, and all were winners. Missed some days and it was pretty casual testing, but all live trades with small lots

Just looked at the 3 pairs you mentioned, and haven't tested other TF's. Most of the trades were E/U.

So that's very good. Sure I know there will be losses, but thanks for bringing this strategy to our attention. Cheers.
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