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Re: Reversal Swing Convergence Divergence

Thought I'd just add my  worth

One of my preferred trade type is divergence and using lagging indicators to find them.

The following relates to long trades (and if it means anything, I trade EOD)

We tend to relate divergence trading with entering a trade at its turning point (say downtrend to uptrend)

This does not always result in a "useful trade" - but whats new about that!!

All we are doing is observing weakness in a trend which usually results in a move in the opposite direction

Identifying divergence is not that hard!!!!

Here are a couple of setups that I use:

The stochastic is a popular indicator so we will base this post on using it and price, I use 5,3,3 for the stoch

We will look for bullish divergence in a downtrend

Reason for trade:

The probability of divergence leading to a trend reversal is well above average (DYOR)

Logic:

Trend weakness is a leading indicator of a possible trend reversal

Tools:

Stoch (5,3,3) and RSI(9)

The stoch is a popular lagging indicator, but is good at identifying turning points. So we use this to find pivot lows

RSI(9)

Because its trace has well defined pivots hi/lo

An aside: the RSI trace is virtually a mirror image of its price line chart, both are normally based on closing prices,but has the advantage of showing divergence and having more pronounced pivots

It can also be used for line studies

Scan:

Stoch buy signal, at around its 20 zone

Methodology

1 Aggressive  2 Conservative

See below

Trade management

Resulting trendline or as per your trading plan

Methodology

1 Aggressive

We use the stoch scan to find buy signals in the 20 zone

Add the results to a watch list

We then monitor the subsequent indicator trace, looking for price to continue lower, but the down swing of your indicator to be above that of the initial buy signal

When we have this, we have divergence - but not confirmed divergence

So we trail the high of each subsequent lower bar with a buy order until we are pulled into the trade.

This is probably not acceptable for most of us (too much work) - instead we could just check any chart which we may have occasion to have on our screen and look for this setup

2 Conservative

Scan your universe for stoch buy signal in the 20 zone

and RSI in the 20 zone.

Eyeball the resultant stocks etc

If you can connect the last RSI pivot low with its previous pivot low, and the resulting trendline is sloping upward - then you have either found divergence or an upsloping trendline - either of which are tradeable!!!

there you go, the above is the basics of how I trade divergence

I'm sure you can improve on it

If you use indicators - make use of their attributes. Some are leading (I only know of one, but that does not mean that there are no others) and most are lagging

If you trade a setup, know why you are using the setup

Hope the above rabble is deciferrable????????? (must learn to spell) and is of use to somebody

Peter

PS I have found that the most successful divergence trades are when we get three price/ indicator consecutive pivot low divergencies (sometimes the 1st two do not result in a reasonable move)