DuettoFX and Hidden Divergences 2

Ciao a Tutti,

I know there is a lot of expectation regarding the upcoming release of DuettoFX EAs (on the 29th of March, by the way), but I’d like to remind that DuettoFX also has a lot of potential for manual traders, especially when trading divergences. I’ve already discussed about “regular” divergences in some posts:

Consider that divergences can help you in two ways:

  1. you can enter a trade in the right direction before the DuettoFX cloud triggers a new trade, so you can win more pips
  2. you can exit a trade that was entered with DuettoFX near to the Highs or Lows, so you can win more pips once again :-)

Today I’d like to discuss other two topics related to “divergences”: the correct way to draw divergences on your charts and “hidden”divergences. Usually the oscillator used for spotting divergences is calculated exclusively on the “Close” price of each candle, and DuettoFX makes no exception. For this reason it is important to understand that “High” and “Low” prices of each candle on your chart are totally irrelevant to divergences. You cannot draw Higher Highs based on the Highs and Lower Lows based on the Lows, but you should only connect the “Close” prices of your candles. Therefore the best thing to do is to visualize a “Line Chart” on your MT4 platform, while Candlesticks and Bar Chart may be misleading (at least if you are a beginner in the field of “divergences” :-)

As an example look at the following hourly Line Chart of GBPUSD (click on it for a better view):

During the last month GBPUSD gave perfect examples of both “regular” and “hidden” divergences.

The “regular” divergence is a “reversal pattern”:

  • Higher Highs (HH) on price and Lower Highs (LH) on the oscillator anticipate a bearish reversal (Regular Bearish Divergence)
  • Lower Lows (LL) on price and Higher Lows (HL) on the oscillator anticipate a bullish reversal (Regular Bullish Divergence)

On the contrary “hidden” divergence is a “continuation pattern”:

  • Lower Highs (LH) on price and Higher Highs (HH) on the oscillator anticipate a bearish continuation (Hidden Bearish Divergence)
  • Higher Lows (HL) on price and Lower Lows (LL) on the oscillator anticipate a bullish continuation (Hidden Bullish Divergence)

If these concepts sound new to you my suggestion is that you print the chart above and keep it near to your trading desk 😉 I’m sure it will give you another good edge to your trading business.

Of course it is also important that you use the right oscillator with the right settings when hunting for divergences on your charts. DuettoFX with its standard settings does an extremely good job in this regard 😉

Don’t forget we are putting the power of DuettoFX on autopilot next Thursday (March 29th) with “DuettoFX DLS Trader” EA and”DuettoFX Swing Trader” EA. Stay tuned 😉

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2 thoughts on “DuettoFX and Hidden Divergences

  • chiffon

    Hey Paolo, I’ve used the divergence technique a few times and it works well. My question is what do you use to confirm the entry and what exit strategy do you use? Often times the divergence will form then prices keep on going the same direction. The divergence with the indicator will still be there but price is moving against us. How do you pinpoint your entries and exits is what I’m wondering. Keep up the good work! By the way I have seen some divergence indis that work ok, but I’m sure between you and Andrea you could come up with one for Duetto(wishful thinking and subtle hint lol).

    • Paolo Post author

      Hi Chiffon, before entering a trade I wait some candles after the local high or local low on the oscillator to be sure that that high or low is really there (and not my imagination). As an example look at the picture on this post: http://pimpmyea.com/a-357-pips-ride-with-duettofx/ I entered on the dotted vertical line when it was crystal clear that the previous local high on DuettoFX was a real high. I also look at a smaller timeframe to be sure that price has “broken some structure” in the direction I’m anticipanting. As an example if I want to sell then on a M5 chart I should be able to see price violating a recent swing low. The stop loss can be placed on the recent swing high of the H1 chart. As far as the exit is concerned the first 24 hours are crucial. Usually a good trade goes substantially in my favour in the first 24 hours, otherwise I may consider to close the trade. I also keep a look on the cloud of DuettoFX, because it may suggest that price is going to continue in the same direction of my divergence trade. I’m already considering to code an EA that is able to pinpoint DuettoFX diverngences 😉