Uncertainty about divergences- or why I've slowly diverged from any understanding...

[grudovz]

Dear All,

I read the school topic about it, but was still unable to understand why the divergences play out the way they do(assuming the aforementioned signal is correct, of course). Can I get some clarification please?

So my logic is:

For normal divergences-

In a downtrend price makes a LL, while the indicator makes a HL. How does this show strength? Stregth as in buying interest outweighs selling interest or strength as in stregth of the underlying move?

Anyway, The indicator shows momentum is building towards increase of prices buy signal? On the other handthe Stochasti would be moving out of oversold territory. Does this not mean the price move is likely to continue. So confused ?!

In an uptrend price makes HH, while the indicator makes a LH. This indicates momentum towards lower prices- sell signal? Why are bulls considered "exhausted" isn't price moving OUT of overbought territory signaling likely continuation of the prior up move?

For hidden divergences-

In an uptrend price makes HL, while the indicator makes LL. How does this signal strength and continuation of trend. Is it not the same as price making HH and indicator making LH- momentum towards lower prices ?!?

In a downtrend price makes LH, while the indicator (MACD, Stochastic, RSI) makes HH. Is this not a buy signal? Does it not show tendency towards higher prices being reached in the near future. On the website it says it shows underlying weakness (of what?) and continuation of move to the downside.

PS. Using the MACD or Stochastic or RSI should not yield a difference, correct?

I am completely confused and it has become utterly impossible for me to understand the logic behind these divergences. I can still learn it by hearth by this would lead to very unfavourable outcomes in the long term. PLEASE somebody help me and clarify this for me. I will be most grateful.

Thanks,
Jay

[grudovz]

Would somebody try to reply to at least some of these questions please

[Jezzode]

For you to understand divergence in great detail you may want to look in the fundamentals of the indicators you are using, such as the RSI or MACD. You can then ask yourself the question "why is the RSI showing a Higher Low, while price is making a Lower Low"...it is actually very difficult to explain in pure mathematics and would require a lot of workings and examples to prove this.

So for now, just learn that if price making lower lows and the indicator is making higher lows, then price could turn to the upside. The opposite is also true for price moving to the downside.

You really need to just 'assume' this and take it as a given rule.

It's like when you learn to drive a car, you are told that the brake pedal will slow the car down, but you are not told every detail on how the breaks operates, what the mechanics are and why it works in the way it does.

[peterma]

I too have been studying WHY osc diverge. I have noticed that divergence at key s/r levels are important, esp on 30 min + charts.
My theory:
Oscillators are lagging price, if price makes a push, faster and more determined to a particular level - say an obvious stop raid - then price will leave the osc even further behind thus creating divergence. Being a stop raid then price will turn back -this is why, in hindsight, it is possible to see these highs and lows with osc divergence.
It seems to me that in a ranging market these divergences can help with entries and exits.
Still studying type 2 , work in proress.

[Jezzode]

I've been researching Divergence for over two years now, as it's a core factor within my own trading. One comment that I can make with a high degree of significance is that any divergence on it's own merit will not provide you with an edge. There are as many false divergence signals as there are true divergence signals, and thus should be combined with other solid trading techniques. Divergence can work will with Fib's on the retrace and extension levels, and also at significant levels of support and resistance, although these 'significant' levels will change in the views of other people and so are open for negation. As for oscillators lagging with price, I dont really think that is true, they are up-to-date with price action and if used correctly on the close price of each time frame candle they can be a very valuable tool.

[brinkfx]

hi....it looks like jezzode knows his stuff...but i am new to forex..
the way i look at divergence and hidden divergence is that i dont actually put much weight on it..
the way i look at it..prices even of pairs that have high correlation...must diverge all the time...otherwise cross currency pairs would be a straight line. chart.

another thing is if a pair or oscillator shows divergence then all it is saying is the rate of change between corrolated pairs is different....so whats the big deal...if your price action on the charts say trade ..only then is it good to trade.

some may say ...well that means that the smart money is buying lots of euro/gbp.......but if someone is buying lots of euro ..then someone must be selling lots of euro/gbp...so it really balances out.
or maybe somone is selling lots of gbp/usd ..so to me it doesnt carry much weight..

i would say put more weight on actual price action on the chart and be more alerted when support and resistance lines are being broken..the charts have all the information you need...and its the best indicator in the world...its precise and its current.

plus i would assume divergence may happen when say uk wants to pay america for its gas or something.. the americans need paying no matter what the market is saying ..

so like i said im no expert...but for now i wouldnt worry too much...you may get caught up in a lot of confusion..
i think its more important to grasp the real basics and get a good fundamental trading technique..and then add to it as you learn along the way...as it can get extremely complex., and i also think you should put the indicators in the dustbin...seriously i went that route at first...and they have to be really studied hard to understand how to use even one of them properly.
or take them with a pinch of salt...and just use them for added confirmation of your price action trading...you wont regret it.

[grudovz]

jezzode and others, thanks. I like the comment about the break of the car. True that to truly understand I would need much more knowleadge...

Slowly getting there though

[purplepatchforex]

I'd suggest not to bother with divergence at all, it doesn't really make sense, that's why you're finding it hard to make any real sense out of it, stick to PA.

Get candlestick trading for dummies.

[Jezzode]

I guess we all have different understandings of different trading tools
I personally use divergence, although with several filters, to find the majority of my trading opportunities.

Divergence on an Oscillator is simply a disagreement between price its self, and the lagging moving average of price.

RSI Workings.

100 - (100 / (1 + RS))

Where RS = Average Gain / Average Loss