Which is more profitable: Trend or Divergence trading? | Forex Factory

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Which is more profitable: Trend or Divergence trading?

  • #1
  • First Post: Aug 25, 2006 9:42am Aug 25, 2006 9:42am
Is it easier to make money trading pullbacks with the trend or to trade divergences?

Trading divergences with the trend would seem to be the best but, in my opinion, the vast majority of good (look good on chart) divergences in different time frames are going against the trend and trying to pick tops and bottoms which is supposedly a loser's game.

Most people suggest trading divergences is a great way to make money but doing so would violate the axiom of trading with the trend (trend is your friend).

Thanks for the input.

Jeff
  • #2
  • Aug 25, 2006 10:37am Aug 25, 2006 10:37am
Quoting jmbtx
Is it easier to make money trading pullbacks with the trend or to trade divergences?

Trading divergences with the trend would seem to be the best but, in my opinion, the vast majority of good (look good on chart) divergences in different time frames are going against the trend and trying to pick tops and bottoms which is supposedly a loser's game.

Most people suggest trading divergences is a great way to make money but doing so would violate the axiom of trading with the trend (trend is your friend).

Thanks for the input.

Jeff
Could you explain this a little bit more please?
What are:
1. trading pullbacks with the trend
2. trade divergences?

.
  • #3
  • Aug 25, 2006 10:42am Aug 25, 2006 10:42am
Quoting jacko
Could you explain this a little bit more please?
What are:
1. trading pullbacks with the trend
2. trade divergences?

.
Jacko, there is plenty of information on the web about this sort of thing. Please do a google search on the topics and do some light reading. It will clear up a lot of the confusion...and probably get you started on the right path to profitability.

The same goes for any other newbies out there. I would definitely suggest a web search on both of these topics. These are 2 very classic trading styles and have existed since the birth of T/A.
  • #4
  • Aug 25, 2006 11:33am Aug 25, 2006 11:33am
Picking tops and bottoms is a horrible idea, I'm not sure if anyone can do it consistently. Most times traders try to pick what they believe is a top or bottom, and then end up averaging into the position (another bad idea) when price continues in the direction it was going, to try and salvage a bad trade to begin with. I think it is simpler to assume price will continue in the direction it's going, trends are powerful things. It took me a year, but I finally stopped trying to pick tops and bottoms, and I'm doing much better now.
  • #5
  • Aug 25, 2006 11:42am Aug 25, 2006 11:42am
Quoting SisterCurare
Picking tops and bottoms is a horrible idea, I'm not sure if anyone can do it consistently. Most times traders try to pick what they believe is a top or bottom, and then end up averaging into the position (another bad idea) when price continues in the direction it was going, to try and salvage a bad trade to begin with. I think it is simpler to assume price will continue in the direction it's going, trends are powerful things. It took me a year, but I finally stopped trying to pick tops and bottoms, and I'm doing much better now.
I completely agree. Tops and Bottoms are much harder to trade. Understanding divergences will help you know when to "stay on the sidelines"...so it's still important to be aware of what they are.
  • #6
  • Aug 25, 2006 11:51am Aug 25, 2006 11:51am
currencies are a perpetually trend of a trending retraceable market and once trend is determined stack a couple of times and its easy to show big gains over holding for daily stoc's to reverse.
Trading should be FUN, If not your playing over your head !
  • #7
  • Aug 25, 2006 2:43pm Aug 25, 2006 2:43pm
Divergence trading works if you use multiple time frames and wait for confirmation. A 'counter trend' divergence signal on 5m can be a 'with trend' signal on the 15m or hourly. Confirmation can be a trend line break, zero line cross, MAs.
  • #8
  • Aug 26, 2006 6:25am Aug 26, 2006 6:25am
Quoting jacko
Could you explain this a little bit more please?
What are:
1. trading pullbacks with the trend
2. trade divergences?

.
I have done a little research and found the following info. Am I on the right track?

1. trading pullbacks with the trend
A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentumA falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum.
Often pullbacks are seen as buying opportunities after a security has had a large upward price movement. It is important, however, to analyze closely any pullback as it may be a sign of a definite trend reversal or a slight pause in the upward trend, each having very different trading implications.

2. trade divergences
Traders make transaction decisions by identifying situations of divergence, where the price of a stock and a set of relevant indicators, such as the MACD, are moving in opposite directions.
In technical analysis, divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Positive divergence occurs when the price of a Forex pair makes a new low while the indicator starts to climb upward. Negative divergence happens when the price of the Forex pair makes a new high, but the indicator fails to do the same and instead closes lower than the previous high.

Interestingly, Investopedia states that "Unfortunately, the divergence trade is not very accurate - it fails more times than it succeeds. Prices frequently have several final bursts up or down that trigger stops and force traders out of position just before the move actually makes a sustained turn and the trade becomes profitable".

mrmikal

Although I am not really a "newbie", I do appreciate your help.


Jacko

.
  • #9
  • Aug 26, 2006 8:50am Aug 26, 2006 8:50am
Quoting jacko
I have done a little research and found the following info. Am I on the right track?

1. trading pullbacks with the trend
A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentumA falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum.
Often pullbacks are seen as buying opportunities after a security has had a large upward price movement. It is important, however, to analyze closely any pullback as it may be a sign of a definite trend reversal or a slight pause in the upward trend, each having very different trading implications.

2. trade divergences
Traders make transaction decisions by identifying situations of divergence, where the price of a stock and a set of relevant indicators, such as the MACD, are moving in opposite directions.
In technical analysis, divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Positive divergence occurs when the price of a Forex pair makes a new low while the indicator starts to climb upward. Negative divergence happens when the price of the Forex pair makes a new high, but the indicator fails to do the same and instead closes lower than the previous high.

Interestingly, Investopedia states that "Unfortunately, the divergence trade is not very accurate - it fails more times than it succeeds. Prices frequently have several final bursts up or down that trigger stops and force traders out of position just before the move actually makes a sustained turn and the trade becomes profitable".

mrmikal

Although I am not really a "newbie", I do appreciate your help.


Jacko

.
You are on the right track, Jacko
"Even the word impossible says that I M possible"
  • #10
  • Aug 26, 2006 9:32am Aug 26, 2006 9:32am
Quoting Thruline
Divergence trading works if you use multiple time frames and wait for confirmation. A 'counter trend' divergence signal on 5m can be a 'with trend' signal on the 15m or hourly. Confirmation can be a trend line break, zero line cross, MAs.
I agree totally. This is one of my favorite tactics. You can really get hooked into some fast movers this way and "get clear of your stops".

I like to take partial profit on the initial move and then let the remainder ride.
Profit is where readiness meets Opportunity
  • #11
  • Aug 26, 2006 9:37am Aug 26, 2006 9:37am
Quoting jacko
Could you explain this a little bit more please?
What are:
1. trading pullbacks with the trend
2. trade divergences?

.
I have suggested this book a few times, but there alot of books out there and I really feel this is the best and most complete on good technical analysis.

The Master Swing Trader by Alan S. Farley.

Read it over and over till you just plain know it. Then apply it to your favorite pair until you see the classic set ups intuitively.

Throw in some Fundimentals for confirmation of direction and you will be the master. LOL
Profit is where readiness meets Opportunity
  • #12
  • Aug 26, 2006 9:45am Aug 26, 2006 9:45am
Quoting jmbtx
Is it easier to make money trading pullbacks with the trend or to trade divergences?

Trading divergences with the trend would seem to be the best but, in my opinion, the vast majority of good (look good on chart) divergences in different time frames are going against the trend and trying to pick tops and bottoms which is supposedly a loser's game.

Most people suggest trading divergences is a great way to make money but doing so would violate the axiom of trading with the trend (trend is your friend).

Thanks for the input.

Jeff
I don't think this can be answered without YOU. Everyones peersonality and "feel" of the market is different. I have made money both ways but I am more comfortable in a trend. However, one of my partners is a feirce fader and counter trend player and he is seldom wrong. The scary thing for me is, he does it by timing and feel. I only fade when the technical analysis supports it and then with tight stops. Different people have have different gifts and vision. I can't imagine what would have happend to me if I was told I could only play fades and likewise if my partner was told he could only buy pullbacks.

Another thing that must be said about this specific to forex is knowing what market you are in and knowing where you are in the trading range.
Just know that if we are trending then pull back are the action. If we are in a range then divergences plays that coincide the the range or price channel are excellent technical plays.

We are currently in a nice 4hr bear channel on the suisse right now with basement at 1.2200. Look at that on a 4hr chart with some channel lines drawn and you will see the OPPORTUNITIES.
Profit is where readiness meets Opportunity
  • #13
  • Aug 26, 2006 10:57am Aug 26, 2006 10:57am
You could have your cake and eat it too by trading Hidden Divergence (some traders refer to this as Reverse Divergence). It is divergence that offers you an opportunity to participate with the trend.

The link below is an exellent article explaining the concept.

http://www.trading-naked.com/library...Divergence.pdf

Phil
  • #14
  • May 2, 2007 1:17pm May 2, 2007 1:17pm
Just came across this thread, it's kind of hilarious how people were talking to Jacko when they didn't know who he was lol
  • #15
  • May 2, 2007 7:08pm May 2, 2007 7:08pm
I support trend. I think you get caught into too many "one more" push up
fakes with divergence trading.
  • #16
  • May 2, 2007 8:42pm May 2, 2007 8:42pm
Quoting libertao
Just came across this thread, it's kind of hilarious how people were talking to Jacko when they didn't know who he was lol
I find that funny as well but I guess those kind of things make life colorful. Hehe.

Isn't divergence is just about price momentum? If price is losing it's upward momentum, we bet our money on the short side.
  • #17
  • May 2, 2007 8:57pm May 2, 2007 8:57pm
Finally someone hit the nail on the head !!!

Divergence is wonderful !!! Used correctly it has the best chance to guarantee you some pips...

I use Rob Bookers Arizona rules which is a lot about divergence... follow the rules about trading divergence... and I rarely lose those trades... I have much harder time trading the trend. ( but that's just me )
  • #18
  • May 2, 2007 9:44pm May 2, 2007 9:44pm
Quoting libertao
Just came across this thread, it's kind of hilarious how people were talking to Jacko when they didn't know who he was lol
You have that right...His "hedging" system is one of the best. I've learned more than a bundle about trend trading from him.
  • #19
  • May 3, 2007 2:19pm May 3, 2007 2:19pm
Jacko, you are not only a great trader, but have an equally great sense of humor. i loved that response!..lol....keep up the the good work and humor..................later....vince
  • #20
  • May 6, 2007 4:30pm May 6, 2007 4:30pm
Color me a noob, but isn't most divergence just a pull back to the trend? At least how I use it, if it breaks the trend it breaks it but they both say the same thing at that point. However, I just use divergence for the shorter time frames and trend lines for longer term. Maybe it's just me but I use just about anything that fits in with my system while trying to maintain simplicity, it's never either or with me.

If I had to pick one though, it would be the trend. Divergence can be profitable but alone it isn't near as reliable.
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