How Does it Work?
The indicator locates divergences; that is situations where there’s a temporary disconnect between an oscillator such as MACD and the market price. In typical cases the MACD (or whichever oscillator is chosen) is moving against the price over a short period. These create trading opportunities.
Divergence is a favorite strategy among technical traders. This is because of its clean signal and ability to locate high probability market turning points. Figure 1 below shows an example.
This tool uses a dynamic sampling method so that low probability divergence trades are filtered out in the early stages. The remainders are checked against a number of other criteria to maximize the success rate.
Buy signals are generated only where the market is deeply oversold and sell signals where the market is deeply overbought. These combined with situations where momentum is slowing are often seen where a market correction is building.
The indicator makes trade suggestions which you can act on or ignore. The trade suggestions are displayed on the chart. But if you don’t want to watch the screen all day you can receive instant alerts by:
- SMS – Using push notifications
- Pop up alerts
The indicator doesn’t place trades for you. However, if you are looking for a fully automated system the template provided will let you easily hook it up to your own expert advisor.
The indicator has a number of configurations to allow it to work with any instrument, timeframe or trading system. The most important of these is the choice of oscillator. A selector will set the oscillator from the following choices:
- MACD – Moving Average Convergence Divergence
- RSI – Relative Strength Index
- Stochastic – Stochastic oscillator
- OsMA – Moving Average of Oscillator
- CCI – Commodity Channel Index
These tools are all built into Metatrader 4 so there aren’t any custom tools to install.
What about Redraws?
People often ask about redraws. A redraw happens when an indicator draws something on the chart in the past. In some cases redraws can’t be avoided because the interpretation of a chart pattern takes more than one bar to complete. This is the case with divergence. To help understand this, take a look at Figure 3 below.
The divergence pattern here happens over seventeen bars. This pattern is shown between the dark blue lines. Further to this, the indicator uses an extra two bars to confirm that 1) the pattern is indeed a divergence, and 2) that the pattern is complete.
The detection point for the complete pattern is marked with the green arrow. The arrows are always placed in real time. So these are the time points at which the trade signal and alert is actually made.
The number of detection bars (lag) can be set in the configuration, but it has to be at least one bar.
USDCAD H1 Chart Example
The labels are displayed in the main chart and the trade signal (arrows) is shown in the lower indicator window. As explained above, the arrow is the actual detection point for the entire pattern and is always made in real time. So the arrows show which time points you would actually trade.
GBPUSD M1 Chart Example
Three alert types can be configured. With the alert box, a popup appears in the terminal window whenever a trade signal appears. You can also use email alerts, or a mobile alerts. Email alerts and mobile alerts will use the settings in your Metatrader terminal (see Tools->Options->Notifications).