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  1. #1
    Legendry Member Michael Hodges's Avatar

    Divergence; The Flip Side Of Technical Analysis !!!

    Convergences are fantastic ways to predict trend following signals, tests of support/resistance and break outs because they are an indication of strength. Divergences, on the other hand, are a great way to capture potential market reversals as they are an indication of market weakness. This is in effect the flipside of technical analysis and seemingly contrary to typical trend following advice. It's not impossible to trade against the trend, just much much harder, this is why divergence trading should only be attempted with a firm grasp of trading.

    Bogdan gives a good look at the types of divergences and how to trade on them in his article, Divergence; The Reversal and Continuation Tool

    Regular Bearish Divergence: price makes a Higher High, but the indicator just makes a Lower High. This divergence appears in an uptrend and is an indication of trend reversal, so a Put is favored.

    Regular Bullish Divergence: price makes a Lower Low and the indicator makes a Higher Low. This can happen in a downtrend and a reversal is likely to occur so a Call might come in handy.

    Hidden Bearish Divergence: price makes a Lower High but the indicator makes a Higher High. This kind of divergence appears in a downtrend and it is considered a trend continuation signal so use a Put.

    Hidden Bullish Divergence: price makes a Higher Low but the indicator makes a Lower Low. Just like the Hidden Bearish Divergence, this one is indicative of trend continuation, but appears in an uptrend. The Call is the weapon of choice in this case.

  2. Thanks Proteso thanked this post
  3. #2
    Veteran Member hchandra's Avatar
    This type of trading should be used by experts only, it can give great rewards,
    but it also prove to be number one account killer, divergences usually against prevailing trend and we hope to trade against the trend hoping for major reversal.
    Big problems is, sometime divergences can last very long before actual reversal, or maybe it happen only for short term.

  4. #3
    Master Member Bogdan G's Avatar
    Hidden Divergence indicates trend continuation...
    Last edited by Bogdan G; 04-04-2014 at 01:04 PM.

  5. #4
    Junior Member Proteso's Avatar
    I really want to thank Michael Hodges for sharing this divergency theory, i'm working around it and it is just amazing, i can't understand why there isn't much more hype around this as it is very accurate.

    I admit it took me a while to figure this out, but now i think this is the best system i had seen so far and now i just can't do anything without it.

    If possible, i would ask if you know some other mechanics with this level of importance, i feel that with another 1 or 2 systems of this level i can really start profiting with no worries.

    Again, thank you Mr. Hodges

    Edit: also big thanks to Bogdan for the article and to all BOTS pros for keeping up the hard work!
    Last edited by Proteso; 03-24-2015 at 10:49 PM.

  6. #5
    Master Member Bogdan G's Avatar
    Quote Originally Posted by Proteso View Post
    I really want to thank Michael Hodges for sharing this divergency theory, i'm working around it and it is just amazing, i can't understand why there isn't much more hype around this as it is very accurate.

    I admit it took me a while to figure this out, but now i think this is the best system i had seen so far and now i just can't do anything without it.

    If possible, i would ask if you know some other mechanics with this level of importance, i feel that with another 1 or 2 systems of this level i can really start profiting with no worries.

    Again, thank you Mr. Hodges

    Edit: also big thanks to Bogdan for the article and to all BOTS pros for keeping up the hard work!
    You're welcome!... when posting a link becomes more important than the content
    Insanity: doing the same thing over and over again and expecting different results. Albert Einstein (attributed)

  7. #6
    Junior Member Proteso's Avatar
    Quote Originally Posted by Bogdan G View Post
    You're welcome!... when posting a link becomes more important than the content
    I am sorry for that, but i figured out that you was the author when i had already replyed, sorry (

  8. #7
    Legendry Member Michael Hodges's Avatar
    Yup, Bogdan gets the credit for this one, all I did was put it in the forum, but divergences are awesome, I track them all the time and in fact used a divergence to predict the recent bounce in gold, along with fundamental analysis ;-)

  9. #8
    Master Member Bogdan G's Avatar
    Don't worry about it. In fact it shouldn't have posted that comment probably. Sorry.
    Insanity: doing the same thing over and over again and expecting different results. Albert Einstein (attributed)

  10. #9
    Junior Member Proteso's Avatar
    Bogdan you was totally right in your comment, it's just that sometimes i don't think very much before posting and i end up with stupid things; no worries here, who said that the trend is your friend? Sometimes the trend will betray you, but the BOTS pros will not! :P

  11. #10
    Legendry Member Okane's Avatar
    I always point out Stochastic Oscillator Divergence* to newbies.
    What's interesting is that you can have two types of divergence signals. One is the divergence
    on the different timeframes (the obvious) and the second one can be seen on the same timeframe!

    In the first case, the divergence is relative to the Stochastic Oscillator's on the different timeframes
    like H4 being oversold while M5 up to M30 are overbought. This one is the easiest to spot.


    In the latter case, the divergence is displayed through the relation between
    the candlesticks and the Stochastic Oscillator's movement.
    (why am I starting to sound like an astrophysicist :P)

    A great example is seen on this daily chart of EUR/USD below.
    Take a look at those arrows and you should see how price was overbought/oversold at
    an area and then when price came to the same area it was no longer overbought/oversold.
    In this case it indicated a bullish tendency and price later broke the trend line and continued up.

    Click image for larger version. 

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    *Of course, divergence can be displayed by other indies too.
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