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One of the problems with divergences is that you don't know whether price
action will change after one, two, three or ? divergences. You can have
a series of higher lows with your indicator and lower lows with price.
the reverse is also true. It is at times a very good confirming
indicator and it can be an excellent warning sign of a change in price
action. It is not a trading system or a buy/sell indicator. Ira.
TimL51@xxxxxxxxxx wrote:
> A friend suggested I focus on divergences more when trading the
> commodity markets. With that thought in mind, I examined the
> following markets using daily charts and RSI.
>
> Cocoa and Cotten gave excellent divergence buy signals on the lows of
> their recent ranges. Bonds gave an excellent divergence sell signal
> in the 114 area.
>
> Question: Divergence seems as though it would be a difficult
> indicator to backtest. The principal reason being that one is not
> sure of a divergence exitsts until it is confirmed by price action in
> the opposite direction.
>
> Is it possible to program such a system? Does anyone on the list
> trade divergence? If so, how do you use it and what do you use any
> additional indicators with a divergence signal.
>
> Is it even necessary to trade divergence for example, a market that
> is rallying will almost always form a divergence if a closing
> reversal occurs at the top of the price action. Is it better then
> just to trade a reversal signal and ignore divergence?
>
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