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Sep 23

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To trade against divergence or not to trade – that is the question

Well after my comments yesterday regarding MACD Divergence and whether taking note of this divergence and using it as a filter before you get into a trade, I thought I’d do some rough-cut analysis.

Last night the Mrs was out at the cinema so i thought I’d spend the evening doing some backtesting on a strategy over a period of 3 months with and without the MACD Indicator on my screen.

I took one of my simple 15min Pull Back Strategies and manually went thru 3 months of data candle by candle in pure simulated trading. My Forex Tester app allows me to place trades, SL and Profit Limits. I selected a period from 1st August 2007 and 3st Oct 2007 (87 days)  that I know is typically a really quite rough period for EURUSD…..not many of my trading ideas pass this period. For speed I went for straight 1:1 trades with SL at recent swing high/low not taking any trades more than 40pips SL.

After completing the 3 months of testing I went back through the trade period and placed the MACD indicator on the chart. I then removed all trades that were very clearly taking a trade when there was severe MACD Divergence – good or bad.

The Results

Without MACD Indicator : Trades 42   Winning Trades 23    Losing Trades 19     + 4% Equity Growth

With MACD Indicator : Trades 28 Winning Trades 18 Losing Trades 10 +8% Equity Growth

The message is clear my friends…….you will certainly reduce the amount of trades that you take by not trading when you see divergence but look at the difference to your equity :-)

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Permanent link to this article: http://intradayforextrading.co.uk/2010/09/23/to-trade-against-divergence-or-not-to-trade-that-is-the-question/

2 comments

  1. Ayumi

    Thanks for sharing!
    Great work!

  2. FXTraderPaul

    Good post Jimmy, well done.
    I appreciate that in this case you’re looking for reasons to use divergence to keep you out of a trade however a good point to remember is that divergence tends to only work 50% of the time. It should never be traded on it’s own but as one of many tools that are brought together to form a strategy.
    The good part of doing this kind of research work yourself is that it will build confidence and belief in what works for yourself as a trader. And that’s a good place to be. It will also quickly differentiate yourself from the lazy and weak who want the results but are not prepared to put the hard graft in to achieve those results. Remember those are the same people you’ll be taking the bulk of your profits from.
    FXTrader Paul

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