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RE: [Metastockusers] Re: how to determine stoploss for divergence trading



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Hello,

Thanks for posting the chart. The MACD plots makes perfect sense but I must say that I cannot work out how your R2 is calculated, whether you are using weekly pivots, daily pivots, etc. No matter.

I would not say that crosses of pivot levels constitute divergence in my book. Semantics, perhaps. However, your basic idea is good but could I offer a suggestion or two......?

I'll take that as a yes then..............

From my own experience, I believe that pivot levels work differently in the FX market than on stocks, although their use is perfectly valid in both markets. IMO, the strength of pivot levels in FX trading is to provide S/R and likely areas for a trend reversal. Once again, only IMO, when the price pushes through a pivot level, one is looking for S/R at the next level. My sense is that this scenario occurs more often than the price turning back around again through the pivot level, especially at S2/R2 (during ACTIVE market hours).

With stocks, it's different story. You mention that you would be looking for a cross above, and then, below S2 in a downtrend. I humbly suggest that a better strategy would be to look for a cross above, and then back down, though R2. What you are looking for here is a head fake where the market makers are shaking out the short stops, and long limit orders, before driving the market lower still. I rigorously tested, and traded, a successful system based upon this principle. To test it properly was beyond the capabilities of MS so I had to use Excel.

So, for anybody interested, here is The Holy Grail. I called it The Fade:

Long: Buy when the price crosses down through and then back above S2. Exit either when the price crosses R2 on the same day or at the close on the following day.
Short: Sell when the price crosses up through and then back below R2. Exit either when the price crosses S2 on the same day or at the close on the following day.

The problem with this strategy was getting the limit orders all in place at market open. S2/R2 are only hit perhaps 20% of the time so there are a hell of a lot of orders that expire unexecuted every day. For this strategy to work, it is essential to have the orders already in the market because the spike often happens so quickly that the move is all over by the time that you see it. I got jack of all the typing ;-).

Regards,
Kevin

At 20:47 25/04/2005 +0100, you wrote:

I was actually referring to picking tops and bottoms with just divergence indicators as being a mugs game . Sure it s possible, but I would personally much rather go about that challenge with pure fundamental analysis and any old indicator, than with purely just a divergence indicator - for all the reasons I discussed. Perhaps in that respect I am not so different from you, although I have never had any good experience with Elliot and Gann. But that s another story&

 

As to how I code it&well yes, I can understand what you re getting at. I use pivot levels s1, s2, s3 and r1,r2, r3 and then define the beginning/end of corrections on crossovers of these various levels. Therefore a correction window for a sell signal in a down trend would begin when the price crosses above the s2 level and end when it crosses back below s2, resuming the down-trend. Then I simply compare the indicator with price within this window. Of course, that means that if prices run away to the upside and don t cross s2 again for ages then I m going to get a lot of divergence signals&primarily as the first push up will often create an indicator high against which most of the subsequent price high will likely diverge.

 

I ve tried to code it to pick just the primary highs and lows and found it wanting, and so ended up with this approach. Well, like I say it works for me&

 

The chart I posted used MACD Histogram as signals. I also find that the Stochastic Momentum can give good signals.

 

Have attached another chart of GBP 60 minute with the MACD Histogram on it to show you the correction divergences on that. The red line is the r2 level&crosses below this line then back above first opens then closes the divergence window . There is one false signal that I would have ignored as it s too close to the first cross below r2. Notice again how it all goes to pot at the right hand side as the trend changes&

 

 

 



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