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Chapter 18, Part I. Divergence Intro. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: Not at all. Still, let’s return back and take a look at a schematic view of divergences, as in pictures below. Here we can say, that:

    1. If the market makes lower lows but the indicator makes higher lows – this is bullish divergence or convergence. This signal is expected to appear at the end of a downtrend;

    2. If the market makes higher highs but the indicator makes lower highs – this is bearish divergence. This signal expected to appear at the end of uptrend;

    3. Usually, an “indicator” is used MACD or RSI, but some traders use CCI or, say, even Stochastic;

    4. Divergence could lead as easily to a reversal as to some retracement - although price makes new extreme, the indicator shows that momentum in this direction is fading and we can count on some reversal;

    5. Use divergence according to time frame and the time that passed on its forming;

    6. Divergence could be used as an additional signal in a larger time frame trading context.

    Pipruit: Nice pictures. Commander, I’m looking at chart #1 and see that divergence combined with Head & Shoulders pattern. Does it always happen with divergences that it is a fellow traveler of reversal patterns?​
    Commander in Pips: Well, I suppose that you’ve noted already that reversal point on the market starts not occasionally. And very often, when some reversal pattern forms, say, H&S, there are some additional patterns that appear with it - bearish engulfing, Butterflies, AB=CD and others. Since divergence a reversal pattern – it could be a companion of other patterns – 3-Drive, Wedge, Broadening Top/Bottom, Double Top/bottom, H&S and others.

    Appearing of more than just a single pattern will give you much more confidence in the safety of a particular signal. This is one of the major properties of reversal patterns. This is, by the way, the initial thought that lead us to an approach how to filter failed divergences. We will talk about it a bit later.
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