MACD Convergence Divergence

gopu · #1 30th January 2005, 08:22 PM

Hi all,

What is divergence? Also, what is positive and negative divergence? how to interpret this divergence with MACD and Moving Averages?

Please clarify.

Regards

Gopu

sh50 · #2 30th January 2005, 08:41 PM

This has more to do with trendlines than moving averages/macd. When trendlines of prices and indicators point in different directions there is a divergence. There are of two types- positive and negative.

When the indicators make a higher high but the price does not it is positive divergence . The price could be horizontal or be sloping downwards.

Similarly for negative, indicator makes a lower low but price does not.

I remember from indicator's perspective- when it is positive, divergence is positive and vice-versa. It is better if positive divergence is in oversold area and negative divergence in overbought area.

Each positive and negative is of three types which can be better explained with diagrams.

One can look for divergences between prices and MACD histogram, RSI, Stochastics etc.

A real pro can comment better

Traderji · #3 1st February 2005, 09:53 AM

Oscillators are most useful and issue their most valid trading signals when their readings diverge from prices.

A bullish divergence occurs when prices fall to a new low while an oscillator fails to reach a new low. This situation demonstrates that bears are losing power, and that bulls are ready to control the market again--often a bullish divergence marks the end of a downtrend.

Bearish divergences signify uptrends, when prices rally to a new high while the oscillator refuses to reach a new peak. In this situation, bulls are losing their grip on the market, prices are rising only as a result of inertia, and the bears are ready to take control again.

Types of Divergences

Divergences, whether bullish or bearish in nature, have been classified according to their levels of strength. The strongest divergences are Class A divergences; exhibiting less strength are Class B divergences; and the weakest divergences are Class C. The best trading opportunities are indicated by Class A divergences, while Class B and C divergences represent choppy market action and should generally be ignored.

Class A bearish divergences occur when prices rise to a new high but the oscillator can only muster a high that is lower than exhibited on a previous rally. Class A bearish divergences often signal a sharp and significant reversal toward a downtrend. Class A bullish divergences occur when prices reach a new low but an oscillator reaches a higher bottom than it reached during its previous decline. Class A bullish divergences are often the best signals of an impending sharp rally.

Class B bearish divergences are illustrated by prices making a double top, with an oscillator tracing a lower second top. Class B bullish divergences occur when prices trace a double bottom, with an oscillator tracing a higher second bottom.

Class C bearish divergences occur when prices rise to a new high but an indicator stops at the very same level it reached during the previous rally. Class C bullish divergences occur when prices fall to a new low while the indicator traces a double bottom. Class C divergences are most indicative of market stagnation--bulls and bears are becoming neither stronger nor weaker.

Why don't we make this a tutorial lesson and have all technical analyst (both pros and newbies) post charts with examples of any of these divergence!

gopu · #4 1st February 2005, 04:48 PM

Dear Traderji,

What does it mean Oscillators?

Regards
gopu

Traderji · #5 1st February 2005, 05:04 PM

Oscillators are technical analysis indicators that fluctuate beween a mid point or mean.

A good example of technical analysis oscillators are RSI, Stockastics, ROC, etc.

#6 2nd February 2005, 01:30 AM

Hi gopu
Divergences are very crude way of using oscillators.If you have spent time watching intraday charts you would have noticed tht momentum indicators will show divergence for a while and suddenly those divergences vanish as price breaks new territory.They are basically hindsight tools.Divergences sit pretty in hindsight agonizing how u have missed the top.However they get erased out quickly if price moves quickly in the opposite direction.And thts why u will never see a failed divergence when u look back at charts.Seems very simple but very much overlooked.
Crossovers(right hand particularly) are better use of momentum osc. like stochastics

Cheers
CV

-------------------------------

"Trade what you see not what you think and definitely not what others think

andy · #7 2nd February 2005, 02:06 PM

Oscillators are most useful and issue their most valid trading signals when their readings diverge from prices.

Divergence is a key concept behind many signals for oscillators as well as other indicators. Divergences can serve as a warning that the trend is about to change or set up a buy or sell signal.

To improve the robustness of oscillator signals, traders can look for multiple signals. The criteria for a buy or sell signal could depend on three separate yet confirming signals.

A buy signal might be generated with an oversold reading, positive divergence and bullish moving average crossover.

Conversely, a sell signal might be generated from a negative divergence, bearish moving average crossover and bearish centerline crossover.

sh50 · #8 4th February 2005, 06:41 PM

In addition to what Andy has mentioned which are the immediate issues one can look alongside divergence, one can also look for price pattern breakouts, trendline violations, break of previous supports/resistances. Basically, the thing to remember is tha chart is more important than any indicator indication be it divergence or whatever.

While the indicator may give you a good head start
In the overall scenario, it plays a minor part
For the ultimate execution, you have to depend on the chart
Giving too much attention to indicators is placing before the horse the cart
Always remember Technical analysis is less of a science, more of art.

sh50 · #9 4th February 2005, 06:46 PM

I posted the above twice by mistake. I don't know how to delete it. ( Traderji, please guide). I might as well add:-

In addition to divergence
One has to apply one’s intelligence
With diligence
To see at the unfolding price emergence
To see how charts and indicators combine in overall convergence
In this respect if there is negligence
It can only lead to trading indigence
Lets sum it up," Chart action is supreme" in technical parlance.

After writing the above, I bumped into something interesting by Well known TAnalyst Vijay Bambwani," The chart is the meat. The indicator is the ketchup. The indicator is the derivative of the chart and not vice-versa. "

jaideep · #10 4th February 2005, 09:54 PM

Quote:

Originally Posted by sh50

.........."The chart is the meat. The indicator is the ketchup. The indicator is the derivative of the chart and not vice-versa. "

I'd say YEAH!! to that. 'Tis one one thing I understand for whatever little I comprehend. T/A is awesome but this one thing is absolutely 100% basic.

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