Contrarian Divergence Trading with Volume Analysis - CDVT

Seeing so many divergences fail in the current market environment (3 years before up till now) or getting heavily violated by big price moves against the divergence's signal I have concluded that in more cases than not, one can make a profit by trading against the divergence while potentialy also taking into account one or two more filters like Volume.

The first premise at the base of this trading style is:

Price will go against the divergence a significant way before respecting it, IF it will respect it at all.

The second premise is:

Many traders fall in the trap of a divergence and sell or buy too early and take weak, rushed decisions based on them. The unpredictable and merciless market will use them as liquidity. And if they wont see it as a divergence, they will think its a top or bottom and again, will fail with their trades.

The third premise is:

In such a chaotic, volatile market environment that is driven less and less by technicals and more by unpredictable events and fundamentals in the current day, a contrarian approach to trading ie. not following the herd to the butchery may provide better results.

This thread is intended to find out just about how successful it is to trade those divergences in a contrarian way with Volume as additional filter. I wil be posting charts soon and also waiting your feedback. For now, this is not a system but mostly a trade idea. If we find out the results are profitable, then we can assemble a system.

The most important rule would be to catch and observe the first bottom or top that is indicated to be part of a divergence, since that would be the spot with the highest probability for a successfull trade.

A second rule is to focus on timeframes from M15/M30 and above (preferably H1,H4) since if a timeframe is too low, the reliability of this approach would go down as well.

The biggest advantage of this concept is that it can be applied to any currency pair and trade opportunities happen quite often since we all know that tops and bottoms, ranges, accumulations and distributions happen often in the market and they often are accompanied by divergences on multiple indicators like MACD or OSMA.

The second advantage is that the system respects Risk/Reward ratio for every trade that is taken.

Here are a couple of recent examples of what the market actually did. In the second chart you can clearly see how some of the biggest market participants take advantage of small retail traders' naivity and of their weak, non-contrarian, herd following technical analysis systems. Their stops were hit, price followed up higher then dropped again.

Moral being... if 5% are market movers and 95% are just cannon fodder... then better not play by the rules of the 95% and be a step ahead of them.

hi, Mircearoland:
Nice strategy! THX for sharing! Now I can get the basic idea: you wait for a potential failed divergence then enter? How do you determine your entry, stop-loss & take-profit, etc? Also how do you spot failed divergence? Can you go into them a little deeper? THX and keep it coming!

Shuo