Complex trading system #3 (MACD Divergence)
Submitted by Edward Revy on April 19, 2007 - 16:55.
Currency: EUR/USD (preferred) or any other.
Time frame: 30 min.
Indicators: MACD (5, 26, 1) – draw 0 line,
Full Stochastic (14, 3, 3)
EMA 3
SMA 13
Trading rules: watch for divergence between the price on the chart and MACD or between price on the chart and Stochastic.
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Hi cK,
Thanks for the screenshot, I'm posting it below.
Here we are looking at an obvious divergence between price and MACD line. As we can see, sellers were trying to push down hard according to MACD readings, but actually were unable to make a new low on the price chart itself, thus we have a divergence formed, and a crossover of moving averages is logically inviting to enter Long. That's a valid signal after a valid divergence.
Regards,
Edward
What you are describing above is called hidden divergence, and is considered stronger than regular divergence due to being trend following and not counter trend.
I thank you all so much for your contribution to improve my trading. Am very new to forex and all are doing a tremendous job.
Cheers!!!
The chart above looks like it is showing a bearish divergence. Doesn't this signal a continuation of the trend?
Hidden divergence, as the trader above correctly noticed, suggest a continuation of the main trend. But effectively, it is still a reversal - a reversal of a temporary pullback against the main trend.
Regards,
Edward
Question: When you say SMA are you talking about simple or smooth moving average?
Simple moving average.
Regards,
Edward
Hi Edward,
First of all thanks again for your previous information on my question/chart above. After some more progress with FX, I'm back again, with some more questions.
I'm now using this Divergence strategy with ADX and EMA21 included. What I observe is that when ADX is high, thus a strong trend, EMA 21 (and also SMA13) is holding stronger making crossover tough. And when I see low readings of ADX (such as below 20) I'm expecting a more likely crossover. (however, it might crossover and immediately can cross-over in the other direction in the next candle)
Do you agree when I say, if ADX is high (above 40) then EMA 21 will hold stronger as a resistance/support line and there is less likely to be a crossover for Divergence? But when it happens, it is very unlikely that the new trend direction will turn back?
Best
cK
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