How to Make 100 pips Trading Divergences.

[upshotsignals]

There are several ways to trade divergences and several indicators that can help you identify the divergence between price and the indicator itself.

I prefer to use the CCI indicator to trade divergences and it has worked well for me over the past 10 years.

This technique most likely works on many different time frames but I have only used it with the Daily, the 4 hour, the 1 hour and the 30 minute charts.

I prefer to use the “trading divergences” technique on larger time frames to make more money on the trade and I am not required to sit in front of the computer screen minute by minute until price hits a target.

When I find a potential trade set up, I will not enter a trade unless I can find a target. This means a target that I have tested and a target that makes sense by providing a reliable opportunity.

Divergences are, for the most part, easy to spot on a chart. The difficulty is in knowing if price will continue in its present trending move or reverse and provide and sufficient move that will allow for profits in a trade.

I prefer to use the 4 hour and 1 hour together to first, identify the pattern and divergence and then the 1 hour chart to locate the point of entry.

The first chart below is the EUR/USD 4 hour chart. I deliberately left the chart plain without technical drawings to highlight the divergence.
The setting I use on the CCI indicator for the 4 hour chart is 20.

I begin by noticing the new “relative” high in price at the old resistance level and then immediately look to the CCI indicator to see if it is also making a new “relative” high. If the indicator is not making a new high, this could mean divergence and will need confirmation.

In this chart below we will zoom in on the possible trade area and analyze the candle patterns, the price action and look for potential profit levels. Finally identify the stop loss. It is important to think about price first. What I mean by this is that price will create the divergence, not the indicator. The indicator is only the confirmation. Indicators are derived from the price mechanism.
Notice the price swing that creates the divergence. Price moves up one more time to re-test the old resistance on the 4 hour chart and then stops. The “re-test” will always be different so prepare yourself. Sometimes price will move higher than the resistance and other times lower.

to be continued below

 

[upshotsignals]

Now that we see the divergence, we need an entry candle. I prefer to switch to the 1 hour chart to pin point the entry.
I wait until I have a closed bearish candle pattern. (I would look for a bullish candle pattern if I was expecting price to move up)
The entry is on the close of the candle pattern. In this example we have a bearish engulfing candle.
The stop is a few pips above the spike high that occurred just before the bearish candle pattern developed.
The target in this trade is the low of the price swing that created the last spike high. (see chart below for the target)

In this chart I placed an arrow to the profit target. This is also the beginning of the price swing that helped to create the divergence.
The profit target is always the same and if this technique is used correctly (meaning confirmation) it will work in almost every case as long as the last spike in price is at a “MAJOR” resistance or support level. In this case we started by identifying the MAJOR or significant resistance level on the 4 hour chart. I most likely would not have traded a “Sell” trade if the last spike high in price did not occur at a significant resistance level.

The exact trade details for the EUR/USD are:
Sell EUR/USD at 1.4425 take profit at 1.4315
stop was 1.4520
This trade only took a few hours and the price only went against our position buy no more than 30 pips before continuing to our profit target and paying us a total of 110 pips profit.

-Irishtrader

 

[mr.gardner]

Nice post, thanks!

I really like trading the divergence especially when there is pattern such as head and should, double/triple bottom and etc.

Good Luck!

 

[Zuki]

Now that we see the divergence, we need an entry candle. I prefer to switch to the 1 hour chart to pin point the entry.
I wait until I have a closed bearish candle pattern. (I would look for a bullish candle pattern if I was expecting price to move up)
The entry is on the close of the candle pattern. In this example we have a bearish engulfing candle.
The stop is a few pips above the spike high that occurred just before the bearish candle pattern developed.
The target in this trade is the low of the price swing that created the last spike high. (see chart below for the target)

In this chart I placed an arrow to the profit target. This is also the beginning of the price swing that helped to create the divergence.
The profit target is always the same and if this technique is used correctly (meaning confirmation) it will work in almost every case as long as the last spike in price is at a “MAJOR” resistance or support level. In this case we started by identifying the MAJOR or significant resistance level on the 4 hour chart. I most likely would not have traded a “Sell” trade if the last spike high in price did not occur at a significant resistance level.

The exact trade details for the EUR/USD are:
Sell EUR/USD at 1.4425 take profit at 1.4315
stop was 1.4520
This trade only took a few hours and the price only went against our position buy no more than 30 pips before continuing to our profit target and paying us a total of 110 pips profit.

-Irishtrader

Can you get earnforex team to code a divergence indicator?

 

[Ronnie Bailey]

Informative post. Thanks