Trading Divergences with DuettoFX 3

Ciao a Tutti,

as I promised last week, here is a post about a special way to trade DuettoFX manually. You already know that DuettoFX can provide exact entry signals if you follow the rules explained in these post:

However I believe DuettoFX is also a powerful tool for trading “divergences”. We have a “divergence” when price makes higher highs while at the same time an oscillator is only able to show lower highs, or when price makes lower lows and an oscillator is only able to show higher lows. Usually after a divergence price is ready for a substantial reversal, so the trader has on opportunity to sell around a peak high or to buy around a peak low.

Using DuettoFX as the oscillator for spotting divergences is a great choice in my opinion. To be exact the oscillator is the solid yellow “spread” line of DuettoFX, which represents the cloud’s width. As an example in the last 6 months DuettoFX showed 8 divergences on EURUSD (when used in the “duetto” EURUSD vs USDCHF) and all of them resulted in winning trades with a profit potential variable from +150 pips to +1090 pips. The maximum floating drawdown experienced by (some of) these trades was around 50 pips.

Give a look at this summary table:

As a trader being able to spot divergences is a skill that can be useful in many circumstances:

  1. in order to manually enter the best among all trades: high probability reversals with low risk and huge profit potential
  2. in order to stop or set a preferred direction to an Expert Advisor (i.e. allow only Long or only Short trades)
  3. in order to balance a trade incurring a floating drawdown and get the best possible average price for the overall transaction

As an example after the 16th of January 2012 many retail traders have been caught in the bullish reversal of EURUSD, i.e. they have sold EURUSD around 1.2650 just before the reversal (our VoxPopuli system just showed that). In a situation like this, if you have not been wise enough to close the trade with a small loss in the next few days, it is very important to be able to enter the next short trade at the best moment. Entering other short transactions during the bullish momentum is the best way to get a margin call. On the contrary the patient trader waits for a clear reversal opportunity and so is able to get an average price that lets him close the overall transaction at least with a small profit.

Here are the pictures of the reversal setups listed in the table above:

Long trades #1, #2, and #3

Long trade #4

Long trades #5, #6, and #7

Short trade #8

I hope you enjoyed this article. I perfectly know spotting divergences is not an exact science, and also something almost impossible to put into code, but it is something really important to look at and understand as traders. If you are interested in DuettoFX you can learn more on this page. Good luck with your trading 😉

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