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How good are Divergences and Convergences?

Moderators: mntiwana, mrtools

#1
When you use oscillators you may recognize that the indicator and the price don't move in the same direction all the time. We compare the indicator and what happens with the price. For that start here from the indicator (inverted causality). Draw a TL in the subwindow from High to High or Low to Low (I don't like it on the chart because the chart gets messy quickly) and see the behavior of the further price.

Div-Con2.png 
It is a very good early-warning sign that the market is getting weak or strong and that you can tighten your stops or prepare for exit or entry. Which osci you use is up to you. I recommend a momentum setup (short periods) and here RSI/RSX, MACD and Stochastic have a similar results. The behavior between the Highs and Low aren't of interest. You can also take A/D line or Value Charts for more Divergences and Divergences from higher tfs are also very useful. Trend continuation, reversals like trend exhaustion or retracements, decide what you need for your trading style and look for those odds.

Div-Con.png 

Some advices:
- It's no signal, just a sign. You need confirmations.
- Use only Highs of the indicator higher 50 or 0 (when range is from -100 till +100)
- Use only Lows of the indicator lower 50 or 0 (when range is from -100 till +100)
- Use Highs or Lows that are 'in view', no other peak is between. You can compare also Highs or Lows not being 'in view' either of the indicator or price, but don't use Divergences when both aren't in view.
- There is no best Div-indicator. MACD is very good for trend exhaustion, but misses some other good opportunities. 
- Don't let them draw by scripts, they don't find all Divs and are to slow for Scalping.
- When the retracement after a Div is small and will be broken in trend direction, it was likely an test then and an impulse follows.

Div-Con3.png 
With some exercise you have a nice edge in your arsenal and with a scalping setup most of the time you can make your way hand over hand along the price movements.

Happy Trading.
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#2
Thanks for sharing, this is pretty useful material.

#3

Greetings,

Not bad to check for divergence, but in some cases looking for the divergence and even waiting the confirmation might be misleading [smile]

Re: How good are Divergences and Convergences?

#4
Combine it with other approaches. As I mentioned divs and convs are no signal, just a sign that the local momentum and swing High or Low doesn't fit with a point in history and you need more fast and reliable confirmations.

Re: How good are Divergences and Convergences?

#5
Image
Just playing a bit around and hey, a possible convergence on a renko chart forward. Now wait for confirmation and peng or when the confirmation won't come the market will start through as you can see on the divergence on the right side. Happy Trading.


Re: How good are Divergences and Convergences?

#7
Image
Ok, this Renko indi has obviously a repainting problem (when reopened the chart) and the market just stopped, but I hope you see, that the SL can be set very tight and when it is hit you just open a position in opposite direction, because it breaks through with an impulse. So you have a small lose and a big win on the other side.

Re: How good are Divergences and Convergences?

#8
Question to the people who use divergence when trading:
1. Often the two (normal and hidden) divergences contradict each other. Meaning, at the same price zones there is a buy divergence (=buy) and a hidden sell divergence (trend continuation)(=sell)

Do you recognize this also? If yes, how do you deal with it?


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