Comment by talisman on January 19, 2012 at 1:11am

hi chris--good analysis in my view.  there was another blog showing this chart but it indicated to be cautious as there was divergence with some indicators.  i don t usually look at indicators but in this case his point was interesting.  do you consider this type of divergence or stick strictly with the price action?  how does one spot that divergence by just looking at price action? i believe its possible to see these things but im not sure how.  in general if the aussi is going up against the usd it seems the eur/usd does the same.  would this be a way to spot divergence since the eur/usd has not shown strongly it is starting to change trends? i enjoy your analysis and look forward to your comments.

Comment by K.P on January 19, 2012 at 9:43am

I had been looking at the bigger pic from the highs forming a possible triangle.

Comment by 2ndSkiesForex on January 19, 2012 at 10:21am

Hello Talisman,

Why do you need to spot divergence?  Divergence is something that indicators do, but how many times has divergence failed?  How many times has divergence setup and the market did the opposite?  One does not need to see divergence to trade, just learn how to read price action, what it is communicating, what are the levels and plays to watch, and then make your trade on that.  

You can get all the clues you need to know within the price action, so I see no need to have an indicator, just so I can reference divergence.  

I welcome your thoughts.

Kind Regards,
Chris 

Comment by 2ndSkiesForex on January 19, 2012 at 10:22am

@KP

Yep, a pattern within a pattern.  Perhaps the triangle will play out, perhaps it won't.  I generally do not play triangles or pay much attention to them, but I think price action will give the clues in how to play it.

Kind Regards,

Chris 

Comment by talisman on January 19, 2012 at 2:43pm

thanks chris.  good question to my question.  as in most things with forex the jury is out on the importance of anything.  it has been pointed out to me that it could be a useful conformation tool.  i like that concept. i dont like to clutter my decision making so i stick to about 3 things to decide on a trade and focus more on consistancy.  just thought i would check your opinion on the ability to spot divergence strictly with price action.

Comment by 2ndSkiesForex on January 19, 2012 at 3:38pm

The concept of Divergence is directly related to indicators, particularly oscillators such as RSI, MACD, CCI, Stoch, or momentum indicators such as Momentum or Rate of Change.

By itself just using price action, you cannot find divergence because the concept is in relation to a behavior of price and an indicator, so hopefully this answers your question.

Divergence can be useful in trading, but there are going to be countless times where the divergence is wrong, especially in trends - the signal could come many times and fail.  However, by learning to read the price action, you can (imo) spot more powerful clues which will communicate whether the trend will continue or not.

Hope this helps

Kind Regards
Chris Capre
2ndSkiesForex.com

Comment by Gonçalo Moreira on January 20, 2012 at 4:47pm

Nice discussion about the concept of divergence!

It's worth noticing that divergence means nothing more that a "lack of confirmation", which by the way is one of the foundational concepts of technical analysis. It's not a signal in it self as many people wrongly assume; it's a situation which can be spotted between two price series, a price series and an indicator, or even two indicators.

That being said, divergences do not "fail" because they contain no signal attached. :-)

Trading, imo, is about summing several uncorrelated methods. Both worlds, that of "price action" and indicator based trading can be successfully combined.

Divergences have several interesting nuances but require quite a lot of expertize, otherwise you are looking at the same chart as thousands of people.

Bye!

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