Why did this example of hidden divegence trading fail? | Forex Factory

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Why did this example of hidden divegence trading fail?

  • #1
  • First Post: Dec 8, 2013 4:45am Dec 8, 2013 4:45am
Divergence trading is one of the classic methods of TA and looks simple on the face of it. I did however come across a divergence failure, which i find it hard to understand.

Below is the AUDCAD daily charts with a 14 day RSI. As you can see, price makes higher high while RSI makes lower high. According to text book explanations, this sets the path for a hidden bullish divergence. However, as you can see price did make a high but immediately fell through.

Could anyone with experience shed light on this or is it a case of '....none of the methods are 100% right all the time or ... don't rely on just one indicator crap??'

Or did the top of the bullish candle (just before the bearish engulfing) was indeed the high?

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  • #2
  • Dec 8, 2013 6:49am Dec 8, 2013 6:49am
"Divergence trading is one of the classic methods of TA "
Total fallacy.


Why does it not occur to you that it's the price that creates this pattern and not the "divergence" in the indicator ?
The indicator follows the price and is therefore absolutely useless.
  • #3
  • Dec 8, 2013 7:39am Dec 8, 2013 7:39am
Quoting Mingary
"Divergence trading is one of the classic methods of TA " Total fallacy. Why does it not occur to you that it's the price that creates this pattern and not the "divergence" in the indicator ? The indicator follows the price and is therefore absolutely useless.
While I appreciate your response, you don't quite answer the question. Yes, price leads any other indicator (let's forget volume for now, to be politically right). My question was as to 'WHY' did this set up fail, all things aside. Again...

1. Is it because divergence set ups are not accurate all the time? or
2. Should divergence set ups be confirmed with another indicator? (which would be redundant, considering divergence works with oscillator, so adding another one doesn't make any sense)

If I had to answer my own question, i'd refer to the bearish engulfing candle that formed right after the bullish candle.. and if the trade was entered at the high of the bull candle right after divergence formed, at the most, this trade would have resulted in cutting a losing trade quickly. But my answer seems a tad too simple..

anyone can take a different view on this?
  • #4
  • Dec 8, 2013 7:44am Dec 8, 2013 7:44am
Quoting jw1981
My question was as to 'WHY' did this set up fail, all things aside.
You've picked the wrong direction to trade. The pair is in a strong downtrend. You should always check the trend on higher time frame.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #5
  • Dec 8, 2013 8:02am Dec 8, 2013 8:02am
Quoting jw1981
{quote} While I appreciate your response, you don't quite answer the question. Yes, price leads any other indicator (let's forget volume for now, to be politically right). My question was as to 'WHY' did this set up fail, all things aside. Again... 1. Is it because divergence set ups are not accurate all the time? or 2. Should divergence set ups be confirmed with another indicator? (which would be redundant, considering divergence works with oscillator, so adding another one doesn't make any sense) If I had to answer my own question, i'd refer to...

JW, i would say that the price rally went exactly where it was supposed to go. Divergences cannot be the only reason to enter a trade and how far a trade goes is dependent on the S&R ahead of it. Did you hope it to go all the way to the top of the chart just because of a temporary momentum loss? No matter what divergence one should be careful of the S&R ahead of it. Kindly check the chart attached cos it shows the my view of it all.
Hope it helps.

Al
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  • #6
  • Dec 8, 2013 8:09am Dec 8, 2013 8:09am
Hi Vox, thanks for your inputs.. yes that could be one of the reasons... but in hindsight it looks easier. On the daily chart, when I plot the 200 WMA, one can notice that price cut through it. So at that point in time, it seemed like price was going back to retest this WMA before pushing higher... but that wasn't the case.

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What's interesting is that on the weekly chart, when I plot a Fib retracing the latest down swing, price stalled near the 50% Fib and then pushed lower. There was a nice bearish engulfing set up formed right at the top, which was one of the warning signs that came up way before the divergence set up...

Attached Image (click to enlarge)
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I guess that explains!!! Didn't bother to look at the weekly charts to confirm the direction.
  • #7
  • Dec 8, 2013 8:12am Dec 8, 2013 8:12am
Quoting albus999
{quote} JW, i would say that the price rally went exactly where it was supposed to go. Divergences cannot be the only reason to enter a trade and how far a trade goes is dependent on the S&R ahead of it. Did you hope it to go all the way to the top of the chart just because of a temporary momentum loss? No matter what divergence one should be careful of the S&R ahead of it. Kindly check the chart attached cos it shows the my view of it all. Hope it helps. Al {image}

Brilliant!!! This makes a lot of sense..

My take was that, right after divergence formed, (which was also confirmed by a piercing line candle), it would have been a no brainer to go long. The obvious target should have been the recent low (which price did manage to hit), and any further up moves, would have been after price broke through this low. Instead we saw a reversal right near the recent low before price dropped back.

Great stuff man.. thanks for clearing this out and for pointing out something new which I never would have thought of.
  • #8
  • Dec 8, 2013 8:30am Dec 8, 2013 8:30am
Quoting jw1981
{quote} Brilliant!!! This makes a lot of sense.. My take was that, right after divergence formed, (which was also confirmed by a piercing line candle), it would have been a no brainer to go long. The obvious target should have been the recent low (which price did manage to hit), and any further up moves, would have been after price broke through this low. Instead we saw a reversal right near the recent low before price dropped back. Great stuff man.. thanks for clearing this out and for pointing out something new which I never would have thought...
Glad it helped you

Al.
  • #9
  • Dec 8, 2013 8:34am Dec 8, 2013 8:34am
You're welcome, JW.

One thing they don't usually teach about hidden divergence (HD) is that when price turns with strong momentum you'll often see them. Hence when using HD, you must first have assert there is a trend, and make sure you are with that trend.

On the chart bellow, the arrow shows the weekly trend, and the lines show the more reliable HD signal:
Attached Image (click to enlarge)
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"To hold, you must first open your hand. Let go." - Lao Tzu
  • #10
  • Dec 9, 2013 1:10am Dec 9, 2013 1:10am
Use the stochastics as they are more definitive.
Just like any other indicator, context matters alot.
Combine that with two other indicators and see how that plays out
  • #11
  • Dec 9, 2013 2:34am Dec 9, 2013 2:34am
Quoting Danny Maina
Use the stochastics as they are more definitive. Just like any other indicator, context matters alot. Combine that with two other indicators and see how that plays out
Now this is what I call a fallacy... All the oscillators are pretty much the same, to think one gives an edge over the other is a misunderstanding. And to further illustrate, just change the chart to a line chart and you'll see how the oscillators just plot the price movements, albeit within a 0 - 100 boundary. Given this similarity, RSI in my view is the ideal candidate for an oscillator as compared to a MACD or Stochastics.

Check this thread for RSI/Stochs difference: http://www.forexfactory.com/showthread.php?t=208900

And just to clarify, here's the updated chart with Stochs as well.. You can see the divergence across RSI & Stochs and one doesn't give an edge over the other. In hindsight it does show how the bullish move failed, but in real time RSI/Stochs pretty much show the same price action. Hope this helps.

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  • #12
  • Dec 9, 2013 3:06am Dec 9, 2013 3:06am
jw, do you see any divergence there? because I seen none.\
Perhaps you should try learn how to pick real price lows and highs prior to spotting divergence.
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This is more like it
  • #13
  • Last Post: Dec 9, 2013 3:23am Dec 9, 2013 3:23am
Quoting Danny Maina
jw, do you see any divergence there? because I seen none. Perhaps you should try learn how to pick real price lows and highs prior to spotting divergence. {image} This is more like it
Thanks. Will do!
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