Rob Booker Divergence System

October 2, 2006

Though I don't consider Rob Booker my full-time mentor, I still do follow a little of what he's been up to. I did pay for it after all so I might as well utilize it.

Anyway, I've heard him talking more about his divergence system, so I decided to shoot him off an email to find out a little more. What peaked my interest was that he mentioned in one of his videos that it works well during the Asian session. I had altogether given up trading the Asian session months ago. His response regarding his divergence system was "that system works really well in the asian session, even on short term charts like the 5 and 15 min." I'm sure a lot of you know what divergence is but I put together a nice little reference PDF with graphs and examples of the 4 types of divergences. You can download it here:

Forex Divergence 25/08/2006,14:53 90.84 Kb

If you're interested, start looking for divergences on your charts between price and especially an indicator like MACD. You could also use RSI, CCI, or another indicator of your choosing. This requires some work but it may be worth it. When I find the time to look into it more, I'll be sure to post more about it.

Divergence Chart

August 25, 2006

As most of you are aware, divergence can be a good predictor of future price. I posted a couple of weeks ago the differences between the following types of divergences:

Classic Bullish Divergence
Classic Bearish Divergence
Bearish Hidden Divergence
Bullish Hidden Divergence

For someone that hasn't been doing this for years and years, it isn't always easy for me to look at a chart and immediately see that a certain type of divergence is evident. These 4 types of divergences have 4 totally different characteristics and I've been known to make a mistake identifying them. Therefore, I have created a divergence identification chart PDF complete with charts. It's only 2 pages and printed in landscape can really help a lot with spotting divergences. Check it out.

Forex divergence 25/08/2006,14:53 90.84 Kb

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Regular vs. Hidden Divergence

August 4, 2006

I realized today that unbeknownst to me, regular divergence and hidden divergence are absolutely and totally different beasts. In fact, I'm not even sure if I knew about hidden divergence. What this means is that I may have been classifying regular divergence as hidden divergence and vice versa. This is my mistake, one in which I don't want you to make too. So I am going to reference some material to give an overview of both types.

Divergence happens when price makes one pattern and a corresponding indicator makes the opposite pattern. You can use any indicator but the most commonly used are RSI, MACD, CCI, or Momentum. I'm going to go through the process of identifying 4 types of divergence.

The first type is Regular Bullish Divergence.

Characteristics:

Occurs in a downtrend
Possibly signals the end of a downtrend
Possible bullish correction
Lower lows in price
High lows in indicator

The second type is Regular Bearish Divergence.

Characteristics:

Occurs in an uptrend
Possibly signals the end of an uptrend
Possible bearish correction
Higher highs in price
Lower highs in indicator

The third type is Bullish Hidden Divergence.

I would have simply called this next type of divergence regular bearish divergence in the past and I would have also expected it to have the regular bearish divergence characteristics above. Let's first look at a chart of Bullish Hidden Divergence.

As you can see, the price continues its ascent because Bullish Hidden Divergence is a continuation pattern. You have to look closely but look at the MACD in the chart #3 above as opposed to the MACD in chart #2. In chart #3, the price is making higher highs and the indicator is making lower lows and the MACD in chart #3 IS ALREADY IN OVERSOLD TERRITORY. This is quite different than chart #2 as MACD is still in positive territory.

Characteristics:

Trend continuation
Higher highs in price
Lower lows in indicator

The fourth type is Bearish Hidden Divergence.

This too is a continuation pattern as the bearish trend is expected to continue.

You also have to look closely at the MACD in chart #4 above. The MACD is already in overbought territory and the indicator is making higher highs.

Characteristics:

Trend continuation
Lower highs in price
Higher highs in indicator

This isn't the easiest thing to explain. Just look closely at the four charts above and the four different types of divergences shouldn't be hard to see.