If you are going to trade a mechanical method, you are going to have to define what "to the ema" means, 1 tick in front, 2 ticks behind, 3 ticks on either side, or whatever. However you define it, once it is defined, it becomes the 11th commandment, and you follow it the same way every time.
Give that man a prize! Given the information available on that chart, the only way I personally would have traded that char is "1 = fast MACD divergence signal". For me personally that is the only trade on that chart. I am in short at the close of that bar.
my question is on this example on your first divergence price is lower and you would trade it, but Ive seen tons of times you see divergence ie. down trend you see divergence #1 and MacD turning up price continues down, then MacD turns up again even higher its climbing up as PA is still going lower Divergence #2 then finally Macd is even higher going opposite of PA as divergence #3 happens. The PA reverses.
This is the reason I stopped using divergence, it might happen one two or three times before price is confirmed, so how can you verify divergence is going to correlate to price reversing?
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Very true. You can get 3 or 4 failed divergences sometimes. It generally happens in very strong impulsing moves. Some people trade double or triple divergences for this reason, ignoring the first and/or 2nd occurrences. Otherwise you have to take the chance of being wrong a couple of times, if you trade with a high enough risk reward.
I don't generally trade time base charts, but on this chart when I see a 1st strong push in price, which slows down to multiple small range candles, I start watching for a 2nd and 3rd push, any divergence on the 2nd or 3rd pushes I become interested in. On this chart I see a huge 1st push, then slow down, then a lesser 2nd strong push, slow down with divergence, I am interested.
Last edited by monpere; May 2nd, 2012 at 06:30 PM.
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Yup! If you are going to trade divergence, and you are going to take every one, you will probably be in trouble. You need a way to filter the good ones from the bad ones. There are certain divergences I see that I would not trade even with someone else's money, because I know that under certain circumstances it will most likely be throwing money away. But if I am in a lazy moderate trend or a ranging market and I see a simultaneous divergence on my momentum indicator, oscillating indicator, and volume indicator, I am all over it like white on rice
The other thing I mentioned is risk/reward. Looking at the chart posted. I would be entering at the close of the bar that I mentioned and putting my stop 1 tick behind that bar. Given that size of a stop compared to the size of the move that followed, I could afford to be wrong 2 or 3 times and still make up those small losses on the move on the final divergence that worked, if that was the case. I rarely see 2 or 3 successive divergence that did not end up in a decent size reversal.
Last edited by monpere; May 2nd, 2012 at 06:50 PM.
so are you saying in ur experience if i see two and especially three divergences go for it, bc the move will be a good payout. I m askin you bc I know you trade divergence alot. I got burned more times than I can count so I stopped. But thinking back after 3rd usually its a good move, am I right in taking the next one?
That's been my personal experience, but you need to prove this concept to yourself. Never take the word of any trader that something works without question. It may not work for you depending on how you trade. You need to put in the time looking at many hours of historical charts and verifying that this concepts holds true for you and your style and method of trading. You may not trade like me. I generally don't trade 5 minute charts, I trade very small charts, I am a scalper, so I don't look for 100 tick moves, I have small stops small targets.
We are talking about the concept of divergence, if you think it might be worthwhile to investigate, you need to look at it in the context of your personal trading approach. I am a big proponent of backtesting. Before I incorporate any concept in my trading, I go back and look for hundreds of historical occurrences of that concept, and make sure that it does hold true enough to my satisfaction in the way I trade. That's how I think you should proof any trading concept.
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