One user said that according to analysts 70% of divergences are fake. I would like to meet those so called analysts.
This is a simple study, with simple triggers. Other time frames have not been considered, otherwise, some of these divergences wouldn't be taken into consideration when using my trading system. Besides this, S&R levels have not been considered either. For the sake of simplicity, the only triggers were blue impulse and bullish or bearish candlestick. Impulse blue means that the color on the Elder Impulse system is blue. EIS is measuring the direction of a 13EMA and the histogram. That means that whenever there is a down tick or up tick on the histogram, contrary to the prevailing trend, the impulse will become blue, as the 9 day MA on the histogram is quicker than the 13 Ema. There are articles accessible for everyone on the web about this amazing trigger system, and even explanations from it's inventor.
The divergences had a 66% accuracy, and considering the risk reward ratio, the profits would have been much larger. For example, the best divergence had a 7,85 risk reward ratio if the exit is considered the most extreme price on the chart.
Note that this is only theoretical, and I'm not trying to prove how much money you could have made. I am only showing that whoever says that most divergences fail is dead wrong. For this study only 3 years of data have been considered, otherwise the results would have been different, most probably.
Keep in mind : "Divergences are the holy grail of technical analysis". No idea who said that, but he/she was so right!
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Technician
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Actually, IMO divergences are pretty deceiving for the new traders, as they see them as "MAGIC" working most of the times, but the truth is its in hindsight , when it comes to real evaluation of divergences its something totally different. I spent years studying divergences, and i can conclude that counting on divergences can get you broke. I dont mean that they are useless, I use them as part of different tools.
Technician
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for example, by looking at your chart, i can see a lot of wrong signals, where you spotted divergences that do not exist. The first green arrow is not a divergence as price didn't make new lows, or at least touched the previous low. Also the first red arrow is not a divergence as price didn't make new high or even touch the previous high. Then the Green arrow near May 20 2013 low is also not a valid divergence for the same reason. The red arrow at December 12 2013 is not a divergence. So i can surely tell you that this sample is not accurate in giving a useful outcome, due to the errors made and the very small sample size.
Kumowizard
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Yes I agree, divergences are good for calling your attention, and focus more on Price action, but trading on a divergence alone is bit dangerous without an actual reversal signal. Anyway, on the last red arrow he will likely be right, but with that we still have to wait and see where the Price and the local minimum will be exactly at the time of the next MACD bullish cross. So I'd call it possibly a positive divergence is developing.
I will check my model how it looks on my lower 4 Hrs swing trading time frame, but I bet it is still bit far away from a counter trend swing buy opportunity.
Ernestuxas
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I agree
Ernestuxas
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Agree
vlad.adrian
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It depends on how you look at them. Whenever price gets close to a previous high or low and the oscillator is considerably lower or higher, I consider that a divergence. It is my interpretation. This approach does not work in a trending market, but in a choppy market like EURUSD it works pretty well. The second red arrow, it rights in the oscillator window that it is a sort of a divergence, and frankly I should have written that at the first divergence too. I took every divergence on the chart to show that even those divergences that don't look great sometimes work. I did say in the chart that this is a theoretical example and trading with real money at the time divergences were forming would have never made you the money you might think by looking at the chart. I also said that if the period would change, the results would be completely different. I made this chart at 3 am in the morning, I did not have time to check 20 years of data. It might seem that I am just inventing divergences, but actually I am not. I actually trade an almost divergence, and I invite you to check the results on the charts I'll publish in the future with this kind of divergence like the first arrow and the first red arrow. I'm sure I have some published already, I will check and I will post them here. Note that the arrows are triggers, and a divergence might have more triggers.
Impulse blue means that the color on the Elder Impulse system is blue. EIS is measuring the direction of a 13EMA and the histogram. That means that whenever there is a down tick or up tick on the histogram, contrary to the prevailing trend, the impulse will become blue, as the 9 day MA on the histogram is quicker than the 13 Ema. I will post this in the description because I realize now that other users might be confused. However, there are articles accessible for everyone on the web about this amazing trigger system, and even explanations from it's inventor.
Technician
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"I am only showing that whoever says that most divergences fail is dead wrong. " . IMO i think he is dead right..
"Divergences are the holy grail of technical analysis" There is no holly grail of technical analysis
zedtrader
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Sounds like you are trolling his post now @Technician. The way I understood it was divergences, USED ALONG WITH OTHER TOOLS can be very powerful. Anyway appreciate both your analyses and comments but no need to continue to beat up his post here.
Technician
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I am just opposing talking in absolute terms, using phrases like "whoever says that most divergences fail is dead wrong. "
"Divergences are the holy grail of technical analysis". That is not professional IMO, nor will prove any point.
zedtrader
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Yes of course, and for new traders wording like that can be misleading you are absolutely right. I am sure he meant it more for headline value than in absolute terms. Anyway, appreciate your comments and insight Technician.