[chulaihuey]

I am trying to learn how to trade divergences in price versus Stochastic. Attached is a 15 minute chart of EUR/USD for 9/7/2011. There are two divergence trades I indicated (higher highs in price with lower highs in stochastic). The first would have failed and second would have worked. I say "failed" because my exit criteria is a stop a few pips above the swing high.
I am wondering if anyone can confirm my analysis and help me to understand how to further narrow down the good divergence trade from the bad one.

[Do Or Die]

Originally Posted by chulaihuey »

... help me to understand how to further narrow down the good divergence trade from the bad one.

Read here: http://www.traderslaboratory.com/for...tml#post122770

[wrbtrader]

Originally Posted by chulaihuey »

I am trying to learn how to trade divergences in price versus Stochastic. Attached is a 15 minute chart of EUR/USD for 9/7/2011. There are two divergence trades I indicated (higher highs in price with lower highs in stochastic). The first would have failed and second would have worked. I say "failed" because my exit criteria is a stop a few pips above the swing high.
I am wondering if anyone can confirm my analysis and help me to understand how to further narrow down the good divergence trade from the bad one.

Hi,

The first one you called a failure, it would have been a small profit to other traders with a different trade management after entry. Simply, a trade success will also depend upon your management of the initial stop/loss, trailing stop and profit target. For example, I remember a thread by someone that was trading EurUsd and had +80 pip profit and then when the trade retraced he let it go from a profit to a loss. The odd thing was that he said the trade failed.

My point is that you only mentioned your initial stop/loss protection via calling it your "exit criteria" but you didn't say anything about your entry price, profitable trailing stop when the trade moves a certain distance your way nor did you mention your profit target. Thus, depending upon your entry, that trade you called "failed" could have been profitable at a particular distance where you could have converted your initial stop/loss into a profitable trailing stop especially when trading against an obvious uptrend. Therefore, an exit strategy involves more than just initial stop/losses...it also involves profitable trailing stops and profit targets.

You also have a ton of indicators on your chart along with several horizontal lines. Therefore, I will assume you're using them for something. Thus, you should use them to help you minimize the loss of any trade not going your way because there really isn't a way to differentiate a good divergence and bad divergence. Simply, you'll be more efficient with your time & energy in just trying to learn how to better manage losing divergence trades and profitable divergence trades.

Keep your losses smaller and keep your profits bigger

[kuokam]

Originally Posted by wrbtrader »

Hi,

The first one you called a failure, it would have been a small profit to other traders with a different trade management after entry. Simply, a trade success will also depend upon your management of the initial stop/loss, trailing stop and profit target. For example, I remember a thread by someone that was trading EurUsd and had +80 pip profit and then when the trade retraced he let it go from a profit to a loss. The odd thing was that he said the trade failed.

My point is that you only mentioned your initial stop/loss protection via calling it your "exit criteria" but you didn't say anything about your entry price, profitable trailing stop when the trade moves a certain distance your way nor did you mention your profit target. Thus, depending upon your entry, that trade you called "failed" could have been profitable at a particular distance where you could have converted your initial stop/loss into a profitable trailing stop especially when trading against an [B]obvious uptrend[/B]. Therefore, an exit strategy involves more than just initial stop/losses...it also involves profitable trailing stops and profit targets.

You also have a ton of indicators on your chart along with several horizontal lines. Therefore, I will assume you're using them for something. Thus, you should use them to help you minimize the loss of any trade not going your way because there really isn't a way to differentiate a good divergence and bad divergence. Simply, you'll be more efficient with your time & energy in just trying to learn how to better manage losing divergence trades and profitable divergence trades.

Keep your losses smaller and keep your profits bigger

Against an obvious bullish trend. This is more important than the divergence. You should look at it here just to monitor the retracement and get in when the trend resumes.

[wrbtrader]

Originally Posted by kuokam »

Against an obvious bullish trend. This is more important than the divergence. You should look at it here just to monitor the retracement and get in when the trend resumes.

I strongly agree but I don't think he/she was looking for such because he/she seems very focused on divergence that's counter-trend trading on his chart due to the fact it's fighting an obvious uptrend. Yet, if determine to use bearish divergence within an obvious uptrend...use small stops and don't hesitate in covering that losing Short position because there is a trade opportunity involving trading with the trend or realizing the profit potential may be small (not worth risk) when counter-trend trading.

Just as important, the other solution is to be looking for bearish divergence within downtrends instead of within uptrends. Thus, he/she will be looking for divergence signals when price makes a failed counter-thrust back upwards while within a downtrend. This particular price action type of trading involves using divergence trade signals while trading with the trend instead of poor statistical way of trading against the trend.

Therefore, one can look for divergence signals with the trend or divergence signals against the trend.

On a side note...I'm still curious what all those indicators and horizontal lines are being used for.

[chulaihuey]

First, Do Or Die, thanks for the pointer to the posts on Divergence trades. There is a lot of information there, and I will go through it thoroughly. Thanks for publishing that.
Second, wbtrader, I see your point. I was under the 'illusion' that there was some mystical way to divine a trend change indication using divergence. I get your point about fighting the major trend, not the highest probability trade, live and learn.... I have reviewed that trade and there was very little room for me to convert that trade to a positive outcome. I entered when the stochastic made its first counter move at 1.4046 with a stop a couple of pips above the price swing high at 1.4065. (so a 21 pip risk). My first profit target was at 1 x ATR, which was 10 pips at the time, so my profit target was 1.4036. The best I got was 1.40359, and with the spread it did not trigger. So close, hahaha.
In hindsight I can see the risk/reward was poor, but at the time all I had to gauge was the risk. I was not sure of where to place the reward point. That is a problem right there, should not be taking trades without both a defined risk AND reward. Just because I want 1 x ATR does not mean the market is listening :-)
Thanks for pointing out the flaws in the trade. Will keep plugging away and eliminate the errors as they are found.

[chulaihuey]

kuokam, Thanks, Excellent point. Similar to what wrbtrader was saying about "fighting the trend", but your point about using this as a long entry signal to get back in makes sense. Its funny some of these things I know, or should know by now, like the trend is your friend, but in the heat of trading I lose perspective sometimes and miss the bigger picture.
Thanks for the tip.

[chulaihuey]

Wrbtrader.....the lines and indicators on my chart: First, the horizontal lines on the price chart are some leftover Fib lines, I should have taken those off before doing the screen capture. The indicators are an ATR(20), ADX(5) and a Stochastic(8,3,3). I am also using an SMA(40), EMA(5) and EMA(15). Keep in mind I am not an experienced trader, so I am just experimenting with various combination's of indicators to try and find something useful.
I don't have the ATR and ADX expanded because I am just looking at the values at trade time. I am looking to have an ADX >= 25 (indicating there is some trend) and an ATR >= 10 indicating there is an "average" chance of getting (or losing) 10 pips on the trade..
You know just explaining this makes me think why was I going counter trend when my ADX is telling me I have a trend already. That alone is a big insight.....