divergence presentation

7/31/2019 Divergence Presentation

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Price

Momentum

Volatility

Volume


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Tops and Bottoms

Channels

Lower Lows and Higher Highs

Key Price Levels


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For all price patterns, a key component in

determining the strength of the divergence isbased on the significance of the price pattern.

Significance is determined by the number ofcandles to the left and the number of the candlesto the right of the price pivot

The more significance the price pivot, thestronger the divergence setup

Filtering divergence setups by strength willreduce the number of potential setups butincrease the probability of a successful trade


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The significance of the price pivot is determined

by the number of candles to the left and right.The minimum number of candles required is 2 tocreate peakiness. Only significant price pivotsshould be considered for divergence setups.


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Instead of using support and resistance as a line,it is more useful to define S&R in terms of a rangeto identify divergence setups. The wicks that arecommon to both price pivots make identification

of the price range simple.


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Once the channel has been defined by twosignificant swing highs, it sets up four shortnegative divergent trades


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Lower lows and higher highs can be determinedby fibonacci expansions and extensions. Critical

fibonacci expansions are 112.7%, 127.2% and161.8% of the impulse wave.

A

B

The wave isbetween points Aand B.

Look for marketreversal at 112.7,127.2 and 161.8of the impulse


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Range charts are often easier to identify thesignificant swing lows and swing highs for thefibonacci expansion calculation. Note thatfibonacci expansions ignore the retracement.

A

B


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Fibonacci extensions are also very common,especially in markets in which have classicallyretraced prior to the final impulse wave. Themost common fibonacci extensions are 50%,61.8%, 76.4% , with the most common at the100% extension.

A

B

Retrace


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Market reversals often occur at thefollowing key price levels:

Pivot points, Previous day high and low, longterm support and resistance

Often the market reverses at the opening

of new trading sessions At this time, we will ignore these criteria


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Zero lag is defined by calculating the EMA andthen the EMA of that EMA. If needed, I can

provide the NT code.


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The Zero lag MACD identifies crossoversseveral bars earlier than the classic MACD and

also denominates divergence more obviously


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The strength of the divergence is indicated in the MACD.

Ideally, the second wave retraces no more than 50% of thefirst wave

Traditionally, classic MACD divergence is identified withMACD peaks. Always identify divergence in a peak to peakcomparison.

Ensure line of sight (i.e., connect peak to peak without anyobstructions)

Traditionally, zero line MACD crossings were the bestconfirmation of divergence; however, classic MACD gives

minimum examples of this. ZL MACD gives many more zeroline crossings to improve divergence strength. In general,the closer to zero, the higher the possibility of a successfuldivergent trade.


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Stochastics work well on lower time frames toconfirm the divergence established on higher

time frames.


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The stop is the same for both the aggressiveand conservative entry. The entry price willdepend on the experience level of the traderin recognizing the short term momentumindication and long term setup


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Price

Momentum

Volatility

Volume


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The entry is confirmed with the bollingerband, needing to be at or exceeding the bandedge. Target 1 is the simple moving average.Target 2 is the opposing band edge.


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Price

Momentum

Volatility

Volume


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The most useful indication of market

divergence is the one componentunavailable to forex trader: volume.

From a psychological perspective,divergence indicates market exhaustion.

From a volume perspective, a diminishedvolume at a higher/lower or equal price is a

leading indicator for market reversal Tick volume or broker volume may be

worthy of future consideration


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Price: set stops 10 pips above/below

previous swing high or low

Momentum: Stochastics recycle andcross at 80/20 levels

Aggressive entry at LT zig zag formation

Conservative entry at YTR MA Channelbreak

divergence presentation

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