Divergence

[Nelsy-Boy]

I have attached the 1hour chart for the US Tech 100. Since 21:00 last night, momentum has been falling. Yet, price has been rising, albeit very slowly. We have divergence but why was it not a trade on this occasion?

[Nelsy-Boy]

Here is the same divergence but this time in the Daily. Is divergence just a possible warning sign and not a trading signal?

[phillo]

I really think you cannot take divergence on it's own as a signal. I always consider a number of things

[phillo]

Although there was divergence , price was above the MAs - its difficult to call tops & bottoms just with divergence, but you're right to say it can be an early "warning " signal. You wont know of the divergence until after the event , so if using it,  you have to "anticipate" it in my opinion. Another way to use stuff is if the indicator that diverged , then breaks the divergence trend , like this example. I hope I have made myself clear, sorry if I haven't

[phillo]

I found this book useful - it is pretty technical though  https://www.amazon.co.uk/Technical-Analysis-Professional-Constance-1999-03-31/dp/B01FJ1MCWI/ref=sr_1_8/257-2950165-7214930?s=books&ie=UTF8&qid=1547829383&sr=1-8&refinements=p_27%3AConstance+Brown

 

[Nelsy-Boy]

Thanks @elle. Fully understood and another smashing graph!

[Caseynotes]

You are correct @Nelsy-Boy, divergence isn't a signal it's a sign. Decreasing divergence is saying that the latter part of the trend does not have the same force as the earlier part, this is not unusual but may point to a collapse in the near future.

Looking at your Ichi 1 hour chart price is above Tenkan and Kijun and Cloud so that's firmly short term up trend.

The daily Ichi price has gone up through Tenkan and Kijun and gone through the nearside and farside boundarys of the cloud  (even on the default settings) so the long term is now bullish as well (none of the 4 levels of resistance held). If you had extended the view further right you can see the cloud boundarys have just crossed.

[Nelsy-Boy]

Thanks @Caseynotes. I find the momentum indicator off putting at times. The daily says look for an entry point to go long which I did do on demo on the close of the first red candle after exiting the cloud. After todays upward movement in price, the momentum indicator is angled down. How should I read that? Any ideas?

[Caseynotes]

correction to last post - Decreasing momentum is saying ...

[phillo]

[Caseynotes]

@Nelsy-Boy, more force is needed to reverse a trend than to continue one so look to the context of the price action. Also look at the size of the candles, large candles rightly skewer momo higher but no trend can keep laying big candles down continuously so expect momo to drop away. 

For example after a spike momentum always drops away even though price is continuing higher so always look for a reason.

Divergence is better read as a signal latter on in a trend where price is flattening and momentum is falling and trader enthusiasm is waning so look for it in an older trend rather than a new one. 

[phillo]

58 minutes ago, elle said:

Divergence trade updated  - sort of live, right? 

[Nelsy-Boy]

Thanks @elle and @Caseynotes. Very helpful indeed.