Divergence Presentation

Divergence

Price  Momentum  Volatility  Volume 

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 is based on the significance of the price pattern. Significance is determined by the number of candles to the left and the number of the candles to the right of the price pivot The more significance the price pivot, the stronger the divergence setup Filtering divergence setups by “strength” will reduce the number of potential setups but increase the probability of a successful trade

Price pivots can be identified with the use of the Zig Zag indicator or Fractals.  Zig zag offers a visual representation of market swings and is preferable to some traders  The first price pivot is confirmed with the zig zag as a possible divergence setup 

• 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 to create “peakiness”. Only significant price pivots should be considered for divergence setups.

• Textbook examples of a double top and a triple bottom. Due to high volatility, tops and bottoms are often not restricted to a “pip to pip” correlation.

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

• Once the channel has been defined by two significant swing highs, it sets up four short negative divergent trades

• Lower lows and higher highs can be determined by fibonacci expansions and extensions. Critical fibonacci expansions are 112.7%, 127.2% and 161.8% of the impulse wave.

B

A

Look for market reversal at 112.7, 127.2 and 161.8 of the impulse

The wave is between points A and B.

B

A • Range charts are often easier to identify the significant swing lows and swing highs for the fibonacci expansion calculation. Note that fibonacci expansions ignore the retracement.

B

Retrace A

• Fibonacci extensions are also very common, especially in markets in which have classically retraced prior to the final impulse wave. The most common fibonacci extensions are 50%, 61.8%, 76.4% , with the most common at the 100% extension.

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Market reversals often occur at the following key price levels: • Pivot points, Previous day high and low, long term support and resistance

Often the market reverses at the opening of new trading sessions  At this time, we will ignore these criteria 

Price  Momentum  Volatility  Volume 

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Momentum is a useful confirmation indicator of market reversals The drawback of most momentum indicators are that they lag the market, rather than lead it Momentum indicators can be used to identify divergence, a leading indicator Many indicators are useful for divergence, including MACD, price oscillators, stochastics, and RSI MACD is the most useful indicator for identifying divergence but often takes too long to set up and too long to confirm as a trigger

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The zero lag MACD addresses this issue. It identifies the ideal divergence setups without significant market lag RSI works well on a long range chart to confirm divergence setups (cross with angle and separation) In conjunction with the ZL MACD, stochastics or RSI work well to confirm overbought/oversold conditions on short term charts

• Zero lag is defined by calculating the EMA and then the EMA of that EMA. If needed, I can provide the NT code.

• The Zero lag MACD identifies crossovers several bars earlier than the classic MACD and also denominates divergence more obviously

• The RSI works very well on a long term time frame as a trigger confirmation. Even the zero lag MACD gives too late of an entry on a long term chart.

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The strength of the divergence is indicated in the MACD. Ideally, the second wave retraces no more than 50% of the first wave Traditionally, classic MACD divergence is identified with MACD peaks. Always identify divergence in a peak to peak comparison. Ensure “line of sight” (i.e., connect peak to peak without any obstructions) Traditionally, zero line MACD crossings were the best confirmation of divergence; however, classic MACD gives minimum examples of this. ZL MACD gives many more zero line crossings to improve divergence “strength”. In general, the closer to zero, the higher the possibility of a successful divergent trade.

• Stochastics work well on lower time frames to confirm the divergence established on higher time frames.

• The stop is the same for both the aggressive and conservative entry. The entry price will depend on the experience level of the trader in recognizing the short term momentum indication and long term setup

Price  Momentum  Volatility  Volume 

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Bollinger bands provide two useful functions in trading market divergence. First, bollinger bands measure market volatility. Statistically, price remains between the top and bottom lines of the standard deviation bands. Market reversals often occur at the band edges. Second, the bands provide useful targets for divergence trades, typically the most difficult to use price projections. The first target is the the simple moving average. The second target is the opposing band edge. For this study, number of standard deviations is set to 2. The period of the simple moving average is 20. Using an EMA instead of a SMA is preferred.

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

Price  Momentum  Volatility  Volume 

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The most useful indication of market divergence is the one component unavailable to forex trader: volume. From a psychological perspective, divergence indicates market exhaustion. From a volume perspective, a diminished volume 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: needs to include tops or bottoms, channels, or significant higher highs/lower lows ; HT price setups printed on LT entry chart Momentum: ZL MACD needs to confirm no more than 50% wave reduction in peak to peak comparison, RSI (14,3) cross with angle and separation and divergence Volatility: Entry meets or exceeds bollinger band edges; target 1 is SMA, target 2 is BB edge

Price: set stops 10 pips above/below previous swing high or low  Momentum: Stochastics recycle and cross at 80/20 levels  Aggressive entry at LT zig zag formation  Conservative entry at YTR MA Channel break 