Makes 39 servings

  • One MACD, 12,26,9
  • One exponential Moving Average, 21
  • One simple Moving Average, 50
  • Two large Time Frames: Weekly, Daily
  • Two small Time Frames: 240 and 60 min
  • One auto-launch setup for Jforex

Directions:

  1. Click the auto-launch to Jforex
  2. Open daily time frame price chart of any one of the 39 available currency pairs
  3. Pour all of the indicators onto the chart
  4. Save the chart template


INTRODUCTION

A money making recipe that works just as good as it sounds!

Successful currency trading is easier than cooking: price action acts as fuel for indicators and heats up the carefully traded strategy to give us those green pips

Only in dictionary success come before work, so here is the smart work we need to do: Observation! Patience to observe price action from a distance (i.e. on a higher time frame chart) is the key to make more money in this business. Simply because this best practice avoid us from taking an impulsive trade which might be ready for a quick reversal against us! Thus we filter out approx. 20% of the failures that create 80% of our biggest losses. Above all, we get to enter trades just before price move happens, saving us from emotional the toll of waiting after entering a trade.

In this article series, I’d reveal my favorite trading system concisely step-by-step. This edition deals with divergence, followed by more advanced topics in the weeks to follow. So you should be able to grasp the very technique I’m using daily for my live trading. All your comments, feedback will be highly appreciated. 

Hope we all are learn something new with all these wonderful Dukascopy contests.


DIVERGENCE

Price charts show us in a collective way the greed, fear and hope mindset of all traders. Smart money gets out of the trend at final stage and reverses their bias, much before the herd recognizes that U-turn has already happened and they have lost the chance even for a break-even the asset purchased in the bubble.

To identify an impending price reversal, patterns like divergence is imperative for us to learn. This simple yet powerful thing would make you money over and over!

Keeping the focus of article on how I’m implementing this pattern for my trading decisions, would just name the bullish and bearish divergence types below:

  • Regular
  • Hidden
  • Reverse
  • Triple

These four types can be combined with each other, e.g. a triple hidden reverse divergence and we can even make it even complex. However I prefer to use only the first three individually, because the highest winning systems in forex trading are the simplest ones. The reason such systems work out most is because it’s not the system which makes or break’s our trading, factors like risk management, trader’s psychology play a much greater role.

For now, I would leave explaining details of each of these divergence types to the Dukascopy forum’s Knowledge Base section.


My Method

Divergence can be easily spotted using MACD or Stochastic. We can use other indicators like RSI, CCI and Momentum or histograms as well. Since keep it simple is the mantra for my preferred trading system, so MACD with its default settings is the chosen one for my system.

Declining volumes further provide us an added confirmation to MACD divergence. However, please note that the volume given in spot forex is the one of your broker only, while the one on forex futures is the global volume. This is because spot market is not regulated by some central exchange, unlike forex futures.

For identifying divergence, I prefer monitoring weekly, daily and the four hour (240-minutes) Time Frames (TF). Lower TFs also work, only the value (pips) we get is not worth the time invested.

Plus, traders must get successful at higher TFs first, before moving on to play with lower TF for opportunities, which require much more attention, quicker response to ever changing conditions and have more noise, spikes than the higher ones.

Time (Frame) is Money

Higher Time Frames (TF) dictate story for lower TF to follow. So I start my trade analysis every Sunday afternoon with weekly charts. With new month, I start with monthly chart, to get the bigger picture in mind. This is called Top-Down analysis.

Divergences found on weekly or daily TF give powerful trade opportunities. If already in a trade, its call for taking profits before price reverses.

Figure-1 and 2 below shows the EUR-USD divergence found in July, when I started monitoring price levels actively on four hour TF for a trade entry, in the live trading account.

   

Line of Control

The moving averages (MA) come handy for making trade entry. For this system based solely on divergence, I use the 50 MA (Simple moving average) and the 21 MA (Exponential moving average) on the daily and four hourly charts respectively.

50 MA on daily chart represents the 10 week moving average. In stock indices like DJIA and S&P, trends generally bounce up/down from this line. If you don’t find the currency pair adhering to 50 MA, then try the 100 SMA (20 MA on weekly)

21 MA represents the Fibonacci number which confluences with approximate monthly average trading days in currency markets (Sunday evening to Friday evening), volume weighting number used by Banks and Institutions, as well as with the market cycles. Banks, institutions heavily rely on this number for day trading. These two MAs collectively impact decisions made by traders.

After divergence is confirmed on daily chart: watch the four hour TF for a breach of 21 MA line towards our trade setup direction.

Now go down to hourly chart and let price come back to test 50 MA level as support or resistance. This re-test provides a nice trade entry to ride the wave.

Stop loss would be 35 pips beyond previous day’s highs or lows. First take profit point is 50 MA on daily chart or based on price target perfection (to be covered in future articles). Enter trade only if it gives a risk to reward ratio of 1:2 at least.

  

Wrapping Up

Divergence alone is not my “complete trading system” as we’ve yet to learn the confluence of price action and proper risk management features. The system makes money consistently over and over. We filter out our bad trades by combining the powerful strategies like Buy low, sell high and the price target perfection. 

Next article would encompass further details of my pipping recipe!

Till then, happy trading and remember: Count your pips, not your blessings.


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