Divergence

Theoretically speaking, what if a hidden divergence and a regular divergence appeared at the same time. Personally I wouldn’t enter, but I would like to here what you guys would do… Thanks!!!

You know what, I’d look for more confluence to see which side is most favored by my other indicators and chart patterns maybe then according to that I’d enter

In what context are you considering divergence? I suppose there are two areas that you could consider.

  1. The divergence produced by an indicator which is derived from a price chart over a fixed TF
  2. The divergence obtained by overlaying two correlated assets, securities, commodities or FX pairs, such as GBP/USD and EUR/USD and looking for price divergence without any indicators.

Divergence from a momentum oscillator like the Stochastic indicator

OK, well in this case can you provide an image or screen shot of where you have seen both ‘hidden’ and ‘regular’ divergence at the same time.

I’m not an advocate of using this type of analysis for trade entry, although I did do quite a lot of work on RSI divergence which can be applied to Stochastic - divergence is divergence at the end of the day.

I’m struggling to imagine how you would see both at the same time, perhaps because I always used regular divergence and convergence ‘[I]divergenc[/I]e’ in my early learning days.

Well I haven’t seen it yet but theoretical 's help me understand concepts better… I imagine, lets say an uptrend has a hidden divergence, that would be below price and also below most of the momentum of the oscillator but at the same time there is regular divergence above hence in this scenario price would either reverse or continue. But I came to the conclusion that if this were to ever happen and I still relied on divergence then I would look for more confluence, support/resistance zones, candlestick and chart patterns and maybe even where prices momentum is on the Stochastic…

If price is in an uptrend then I’d always consider sticking with buy signals, until otherwise.

As for you example, I would also consider two other metrics.

  1. The strength of divergence between both signals. You could measure this by simply looking to see which divergence signal has produced the most extreme signal.

  2. The length of time that the divergence signal has occurred for, and perhaps consider a way to measure how clean the divergence signal actually is.

Either way, and as you have correctly suggested already, combining other PA elements is key. Using divergence for the reason to enter a trade has laid ruin to many accounts, rather I would look at divergence as a measure of confirmation that an existing trade is looking probable.

This is one of the major problems with off-chart indicators like RSI, MACD and stochastics. Within 10 minutes of setting your screen up there’ll be incidences where one indicator contradicts what price is saying or contradicts another indicator.

Thanks guys, such insightful contributions!

Trade with the trend as a general rule of thumb and half your problems are solved. For the better part, you can ignore bearish divergence in a strong bull market or bullish divergence in a strong bear market depending on the ‘maturity’ of the trend. However you may consider entering a trade - at levels of confluence (as always) - in a WEAK trending or a ranging market in which case you may be tempted to trade in both directions (not recommended for beginners). Know that strong and weak trends are characterised by shallow and deep retracements respectively. A simple concept but the difference is important as it should impact the timing of your trade entries and the positioning of your SLs. Remember too that hidden divergence usually signals trend continuation. If say you missed an initial strong price move, hidden divergence, at confluent levels, may provide a good opportunity to enter a strong trending market… Finally as has been pointed out and as is the case with every other indicator/tool, Divergence is NOT a standalone trading tool but when used as a confirmatory tool it may serve you pretty well.

Well, when you get opposite direction in your indicator from your trading chart, then you should use this trading opportunity according to the divergence trading law! Basically, in my 1st year of trading I used divergence strategy, it’s really useful strategy but the problem is, it produces limited number of entry point in a month! I am a scalper, so only divergence is not enough for me!