Dear good people of SHF
I've been developing a system which I started to trade live seriously only recently. Nevertheless I gain more and more confidence in it the more I work with and on it. With pleasure, I'd like to share this with you guys in the hopes of receiving constructive feedback so that it may grow and improve.
The system primarily builds on 2 concepts, the first being the magnificent CSS by the hand of Baluda (thanks a million for this sir). For more info and material, check the threads in this forum. Secondly, divergences on the 2 most widely used indicators in the world, namely RSI and Stochastics.
For those not familiar with divergences on oscillators, a picture should clarify a lot:
In my experience, divergences are powerful signals and generally work better the higher in time frame you go. Most of the time, when they appear, they give a spot on entry point. However they can't be traded entirely on their own. Why? Because e.g. it can happen that a series of bearish divergences are observed whilst we are in a sustained uptrend. This is exactly where one of the best trend-detection mechanisms in the universe of Forex comes into play - i.e. CSS.
My setup goes as follows:
- Time frame: H1
- CSS:
- Time frame = H4
- IgnoreFuture = True (so "backtesting" becomes much more accessible and "repaint" is not an issue anymore)
- Threshold = 0.20
- Stochastic divergences on default settings (5,3,3)
- RSI divergences on default settings (period 14)
Here are 2 trades I took today:
I'm sure that it comes naturally to most of you how you should trade this. When CSS starts trending in one direction, it is not wise to take counter-trend divergence signals unless you got good reason to do so (e.g. strong S/R-levels, etc). There is however one pattern that you should be wary about and stay alert for. Namely when the CSS starts to display this:
When you see this sort of convergence of CSS lines after some time (usually a few days), it is an early warning of exhaustion of that pair. Try to look for an exit and hold off taking trades until CSS shows you something. This would either be the widening of the wedge between the CSS lines or the direction confirmed after the yellow zone formation. When the yellow zone forms, try to exit asap as well. Only at this point am I willing to close out at a loss since the chances of hitting SL increase substantially. Because I trade small lots w.r.t. my trading account - completely in line with Bob's post here (I urge you to consider his teachings and learn from it what you can, for they are invaluable. So thanks a gazillion to you too sir for your relentless efforts) - I don't worry too much about my trades anymore. Even if they hit SL. My SL is usually 2 or 3 times my TP. So you can gain a handful of pips rather quickly as opposed to letting your winners run for too long. On the other hand, though, this gets compensated by the numerous signals you get to choose from and enter after you've done your due diligence. Thus my personal vision to trading this system rather adheres to frequent scalping on comfortable lot sizes at this point.
Given that the CSS reading is clear, when a confirmed divergence signal appears I usually enter immediately or set a limit order somewhere near an obvious S/R zone. I don't try to second guess it by looking for other patterns, signals or other signs. The markets are the markets and trying to nail perfect entries every time is an illusion. Because of the inherent nature of divergences - i.e. by making use of highs and lows - entry spots shortly after divergences are detected are usually more than adequate. As mentioned earlier, I try to keep my target at a handful of pips. Something along the lines of 2/3 of a pair's ADR. Though often times it is more of a 'visual thing'
. I'm sure there are ways to milk out even more pips, but that's for later. The important thing now is the gist of the method being clear here.Have fun!
Cheers, Aram
!