Has anyone been able to achieve consistent success using Divergence as a strategy? Ive been backtesting RSI, MACD, Stoch and Stoch RSI on random currency pairs over 2015-2019 with very mixed results. Love to hear peoples thoughts.
Divergence is a common way to generate entry signals. But that’s only part the game. an indicator like that can only really be helpful if its confirmation of a primary reason to enter, it isn’t likely to produce great results if it is used as the primary. Performance will be even more compromised if you also use the reverse divergence signal as your first exit signal.
Same guidelines and comments would apply to patterns like MA crossovers etc.
Its more complicated than that.
Thanks for the insight tommor. In your experience, if divergence is a good confirmation, what are the best primary reasons/indicators to enter a trade?
Price is the primary data available to us, so price action is always the primary indicator. All technical indicators are based on price so they form a view of price action: this view cannot use more information than the original OHLC price data so its hard to argue it is better quality or more accurate or whatever. It can be useful to corroborate what you think you’re seeing - it does not CONFIRM it. But even the slope of a MA is a help in interpretation.
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As I look at OHLC price data, Ive struggled to achieve success consistently. Have you got a strategy that works consistently? If so, what time frame are you trading on? Are you glued to a screen all day to achieve success? (note Ive edited this post three times now, I have a lot of questions for someone who seems like they know what they are talking about)
I still don’t understand divergence 
Almost any strategy that you can find which relies on following an established trend can be made to work. There are refinements to where you would enter an uptrend and the choice depends partly on your tolerance of losers plus the firmness of your stop exit rules. So e.g. in an uptrend you could buy at -
- a new high price (e.g. Donchian break-out strategies)
- the close of the first day which closes lower
- a price which is X% lower than the most recent high price (e.g. Fibonacci retracement strategies)
- the close of the second or third etc. day in a sequence which is lower
- on the breach by a rising price of the high of the first or second or third etc. day with a lower close (e.g. Rivalland swing trade strategies)
- on the breach of a prior swing high (e.g. 1-2-3 trades strategy)
- the breach of a fast MA which is rising and which is above a slower MA which is also rising
- the upturn of a fast MA which is above a slower MA which is also rising
etc. etc. etc.
All these will work. No doubt other entry signals too. But its where you put your stop-loss and how carefully you manage position size that will be most important in determining if you will make much money: plus after that, where you decide to exit a profitable trade.
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Check out the babypips course it explains it in there.
I, too, would like more details
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I have done lol
Hmmm… it’s pretty clear on babypips.
So what exactly do you not understand? Are you trying to get the cellular level understanding of what drives divergence?
I am not sure…it is just not sinking in
Take a look at the attached image. I have a 20 pip range chart of AUD/USD and I’ve plotted an RSI at the bottom. The diagonal lines indicate divergence. Price makes a relative high or low while the RSI does the opposite of price. Each of those color coded lines depict divergence in the RSI when compared to what price is doing in that region.
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Just think of it like this. This is a very basic way of thinking and technically the wording is not right but should help to understand.
First dont worry about why its moving or what’s moving it. It doesnt matter. Forget the term overbought, oversold.
The rule: The oscillator (rsi, stochastic etc) follows price. So when price goes up the oscillator goes up, price down oscillator down. That’s it, just remember that.
The oscillator has a range of 0 to 100. So as price increases the oscillator goes up towards 100. Down goes towards 0.
Therefore, when you look at a chart if price makes a high (a new peak), you would expect the oscillator to go up and make a peak. When price goes down, the oscillator goes down. When price then makes a new high (higher than previous peak) the oscillator should also make a higher peak on its chart. That would be normal.
When this does not happen: this is called divergence ie the indicator is diverging from the price action. It is abnormal to our rule.
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What about questions with more details as to which part/s you don’t understand?
I get the theory etc it is just one of those things that seems to escape me.
I never find it on the charts and just get confused.
I’ve started using it in my plan and found it to be very good. So I’d recommend you learn it and start testing it out.
thank you 