Divergence

[john302928]

Hi
Does any one have an idea or strategy to findout legitimate regular bullish divergence on chars? Sometimes chart show regular bullish divergence but price wont reverse, rather they keep on falling with the divergence in place. Please let me know if you have any thoughts on finding legitmate divergences. Thanks

 

[mohan.sic]

Hi
Does any one have an idea or strategy to findout legitimate regular bullish divergence on chars? Sometimes chart show regular bullish divergence but price wont reverse, rather they keep on falling with the divergence in place. Please let me know if you have any thoughts on finding legitmate divergences. Thanks

what do you mean by legitimate divergence ?

It is already in your experience that regular divergence is not working..
Now don't assume that the divergence trades you entered are not legitimate and that is the reason they failed.

Somewhere you read that if Price falls and indicator does not fall it is called a bullish divergence and price should reverse. Apply reasoning and understand as why price should reverse in that case. Then you will know why it fails.

Only when u understand why it works, only then you will know why it fails.

 

[john302928]

what do you mean by legitimate divergence ?

It is already in your experience that regular divergence is not working..
Now don't assume that the divergence trades you entered are not legitimate and that is the reason they failed.

Somewhere you read that if Price falls and indicator does not fall it is called a bullish divergence and price should reverse. Apply reasoning and understand as why price should reverse in that case. Then you will know why it fails.

Only when u understand why it works, only then you will know why it fails.

Dear Mohan
Thank you for your response. I appreciate that.
First to answer your question on what is legitimate divergence.
I hope You know what is divergence. In one line, divergence occurs when price and indicators travels in opposite direction to each other. That is the indication of momentum shifting in opposite direction. Whenever momentum shifting happens price reverses. There are times when price and indicator travels in opposite divergence for long time. during this period, there would be lot of indication of price would reverse, but it wouldnt. These are fake divergences. I supposed to say,we are not able to find the correct divergence. Instead I call it as fake divergence. and at one point in time divergence effect comes in to action and price reverses. So that divergence is legitimate divergence.

Please find the attached snapshot where it shows regular bearish divergence between price and MACD indicator.Look at the red marked lines where it showed bearish divergence couple of times but price didnt reverse and finally price reversed with blue line marked divergence. Those red marked divergences are fake divergences and blue marked divergence is the legitimate divergence. And the Green marked period is the whole divergence period. Here the challenge is to find out that legitimate divergence . Hope you now get what I meant.

http://i.imgur.com/2wpDazp.png

 

[mohan.sic]

In your opinion when it works its legitimate and when it fails its bad and you want to filter out those wrong signals. This understanding is wrong.

There are different indicators. You are using MACD. I use RSI.
A divergence in MACD may not be a divergence in RSI.
Price movement is the same in both cases. But why is one indicator showing a divergence where as the other is not. Now can u say that One indicator is legitimate and the other is not ?

And how do you know that price and indicator will diverge only when momentum is shifting ? And basically what is momentum shifting ?

Divergences occur depending on formulae used in the indicator in regards to price movement ( OHLC positions in the data point ).

During a consolidation phase, when price is moving sideways , indicator may move down. This does not mean that momentum is shifting. Or even in a Uptrend if the price is closing near the low of the data points, you may see a divergence in the indicator ( this happens when the indicator is calculated using OHLC values ) , whereas another indicator which is calculated only using the closing values of the data point may not show the divergence.

Just like above there are different reasons why divergences occur in different indicators. Divergences need not mean shift in momentum of price.

 

[timepass]

Smart_trade has, somewhere in this forum, mentioned about "three-bullet divergence". What your chart shows is a "four" bullet divergence.

I think that it only tells about the unreliability of the divergence as a stand-alone indicator. Try combining it with some other indicator like volume to check if it gives a greater degree of confidence.

 

[varunkochhar]

I have a very simple answer to your question but i see people who are not convinced with my reasoning present in this thread also. Instead of argueing with them i will answer you if you ask in my thread.

 

[john302928]

Dear Varun, I created this thread to discuss about divergence. So you can respond here itself. I am certainly not here to argue with anyone. If i do it would be a healthy discussion only, I am just trying to learn from others on what I dont know and how i could better what i already know and share what i know.
Requesting you to share your views here.

 

[ankur07090]

Mohan pyare ji thoda kam lada kro

 

[vijkris]

Dear Varun, I created this thread to discuss about divergence. So you can respond here itself. I am certainly not here to argue with anyone. If i do it would be a healthy discussion only, I am just trying to learn from others on what I dont know and how i could better what i already know and share what i know.
Requesting you to share your views here.

Let him share his views in his thread.. Ask him doubts in his thread.. then copy the entire conversation in this thread.. I do something similar. check this : http://www.traderji.com/trading-dia...ce-action-forward-testing-10.html#post1218133

 

[john302928]

Let him share his views in his thread.. Ask him doubts in his thread.. then copy the entire conversation in this thread.. I do something similar. check this : http://www.traderji.com/trading-dia...ce-action-forward-testing-10.html#post1218133

Vijay, His thread is meant for something else, If I ask something which is irrelevant to the thread then his thread will be like a dustbin. Let his thread be clean and let him share his view in this thread. Thank you for understanding