Complex trading system #3 (MACD Divergence)

5 bars are more than enough.
The alert about a forming divergence comes even earlier.
Here is a quick sketch I made:

As you can see, we've got the early warning: price already making new highs, but indicator doesn't confirm that. The next is down to observation. We should see a top forming = a swing high (Swing high consists of 3 candles: the middle candle must be higher than its neighboring candles). Once a swing high is in place and divergence between price and the indicator holds, you can get ready and wait for Sell signals according to your entry rules.

Regards,
Edward

Hi
How many closed bars are acceptable for to be able to spot a divergence. For example if the last 5 bars on a daily chart are giving divergence is it a working one?

Hi ck,

Good observation.
Yes, indeed, when ADX is rising and especially when it is high and above 40, 21EMA will act as a strong support/resistance.

Not quite sure I understand the last words:
"..and there is less likely to be a crossover for Divergence?"

When ADX reaches 40 and above, it warns traders that the trend is completely "mature" and it is time to plan for exits and already protect profits by applying trailing stops.

Thus when 21EMA is crossed while ADX readings are 40 and above it is a serious warning that the current trend may be over.

I'd be interested to continue this discussion, and if you can, I'd like you to send me a screeshot explaining your recent post in more details.

Best 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

Simple moving average.

Regards,
Edward

Question: When you say SMA are you talking about simple or smooth moving average?

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

The chart above looks like it is showing a bearish divergence. Doesn't this signal a continuation of the 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!!!

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.

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

Hi cK,

I wonder if you can send me a screen shot to my email

I'll be glad to review it and solve this case.

Regards,
Edward

I've experienced a very interesting case today.

Usually, EMA crosses SMA in the direction of the MACD Divergence (in the chart the bottom part). Is it not?

What happens if MACD divergence (bottom part) is downward and the price is upward (upper part) and EMA crosses SMA upward.

Should I go LONG or not?

Thanks
cK

I found this method extremely profitable, as long as stops are tighter and trail.
Thanks for posting this!
=D Worked for me so far.

Here is a great explanation of MACD divergence by Andy Skinner.

In the video MACD settings are (5, 34, 1) and on the chart there are 5 and 34 EMA.
And that's the link to the introductory video (Lesson #1) about MACD.

Hope this answers your question.
Happy trading!
Edward.