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Tim Trush & Julie Lavrin

Introducing

DIVERGENCE
MASTER TRADER
Your guide to financial freedom.

© Tim Trush, Julie Lavrin, T&J Profit Club, 2010, All rights reserved
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 Table Of Contents

Chapter I: How professionals trade divergence patterns

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Have you ever wondered why the market turns against you when you jump on a promising looking market trend? The most
tempting signal is probably a trap! Divergence masters know how to enter in the opposite direction just before the trend
turns!

Chapter II: Candlestick Pattern Recognizer + Divergence

II.1. Chart set-up____________________________________________________________________4

Prepare your chart.
II.2. Indicator set-up_________________________________________________________________5
More options. Showing the strong divergence patterns.

Chapter III: The definite strategy

III.1. Where to place Stop Loss________________________________________________________8

This protects us from being stopped too soon.
III.2. Quick profit___________________________________________________________________9
Our first goal is to make a profit before the market turns against us.
III.3. Catch the big move____________________________________________________________10
Close the half of the position as explained above and let the remaining profits run. You have a chance to re-enter the trend
and continue to make money.

Chapter IV: How to filter false divergences

IV.1. The standard way______________________________________________________________13

Where most traders use to enter, we are looking for taking a quick profit!
IV.2. The Golden Rule_______________________________________________________________14
To prevent over-trading, we have found a way to recognize the clear divergence patterns. And you don't need to care about
this, the Golden Rule has been already built in the Divergence Pattern Recognizer!
IV.3. The tricky way________________________________________________________________15
Experience has shown that this can be used as a great confirmation tool for any trading strategy. If you already have a
trading strategy or you plan to learn more trading strategies in the future, think of implementing the next steps into your
system.

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 Chapter I: How professionals trade divergence patterns

As the market makes a new high, but the trend weakens, a divergence pattern is formed. In that
situation many traders think that the bullish trend has recovered and they jump on the trend. They don't
realize that the trend could be possibly too weak and it could be a good opportunity to do just the
opposite! Have you ever wondered why the market turns against you when you jump on a promising
looking market trend? The most tempting signal is probably a trap! As there are no more buyers to
move the market, the sellers predominate. Divergence masters know how to enter in the opposite
direction just before the trend turns!

“Disregard the majority opinion. It is probably wrong.”

Max Gunther: The Zurich Axioms

Not every trend reversal is followed by a divergence pattern. But when a divergence pattern forms,
look for the opposite direction and never stay with the trend as the crowd does.

Remember: the less you trade, the more money you make. We will show you how to filter the
unreliable divergence patterns and focus only on the strongest signals. Moreover, we give you a
customizable indicator that can deal with this for you. All the process of recognizing the divergence
pattern in the chart is done automatically. Enjoy the various exit levels and find out what suits your
trading style the best.

You can “scalp” for quick profit on the 1-minute chart, look for intermediate trend change on hourly
time-frame, or spot the big trends on daily time-frame. And you can trade as many currency pairs or
other financial instruments as you wish... but be patient, avoid over-trading.

Now, the Intelligent EA software can trade for you! You may be hearing about various “hokus-pokus”
patterns and wondering: do they really work? The Intelligent EA gives the final answer – yes, and there
are many methods you can tune up and enjoy your own trading strategy.

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 Chapter II: Candlestick Pattern Recognizer + Divergence

II.1. Chart set-up

It is useful to see the divergence pattern on the MACD. Attach the MACD indicator with default
settings to the chart.

Attach the Candlestick Pattern Recognizer to the chart as described in the Forex Candlestick Tactics.
The bullish divergence pattern is marked by the blue line connecting the significant lows. For the
bearish divergence, there is a red line connecting the significant highs.

Bullish divergence

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 Bearish divergence

II.2. Indicator set-up

There are two more options in the Candlestick Pattern Recognizer. To get the indicator properties, press
a shortcut CTRL+I, select the indicator and click Edit.

Only Regular Divergence

In the Magic Forex Divergence book, we have defined the divergence as a discrepancy between price
and indicator movement. When the price makes a new low, but the MACD makes a higher low, it is a
bullish divergence signaling that the trend is going to reverse. This is a classic or regular divergence.
The blue line on the price is sloping down, but the blue line on the MACD indicator is sloping up.

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 Regular divergence

Sometimes, it is interesting to see both lines sloping up. It is not a valid divergence pattern, but we call
it irregular divergence as opposed to the regular divergence. We can see an irregular divergence
predicting the trend reversal on the EUR/USD, Weekly.

Irregular divergence

The irregular divergence pattern is not as strong as the valid or regular divergence pattern. One has to
add more discretion. The irregular divergence is a good signal only if the line in the price chart is
nearly horizontal as in the above example. In this case, it can be considered as a classic divergence
pattern or very close to it. The second low is very close to the first low, but the price just failed to break
through. If you are familiar with the well-known “double bottom” pattern, this is it.
By default, only the regular divergence patterns are shown.

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Only Deep Divergence

The depth of the divergence is a bit subjective term. When you look at the example below, you see two
divergence patterns – a bullish and a bearish. The first divergence is nice, but the second one does not
look promising because the two peaks on the MACD are not very significant.

We consider a divergence to be “deep” if the MACD crosses the zero line. Such a divergence provides
much stronger signal for trend reversal. Other divergences can be used rather as an exit rule as they
signal trend correction.

By default, only the deep divergence patterns are shown.

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 Chapter III: The definite strategy

III.1. Where to place Stop Loss

The best place for a Stop Loss is just below the bullish divergence pattern, or just above the bearish
divergence pattern.

The next example shows that the second turning point can act as a minor resistance point from where
the price uses to retrace and this protects us from being stopped too soon.

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III.2. Quick profit

Our first goal is to make a profit before the market turns against us. We are looking for small profits
here, so don't place the first profit target too far. It is wise to place the profit target at a significant
support / resistance point, not just guessing the certain amount of pips. The “divergence valley” is a
good place for profit taking. The next examples show how the price quickly turns back from this point.

This way we can profit from divergence patterns that result in minor trend change or correction. You
can make consistent profits based purely on this exit technique. But divergence can also lead to
complete trend reversal and we want to take advantage of huge trends.

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III.3. Catch the big move

Close the half of the position as explained above and let the remaining profits run. There are several
good approaches to manage the remaining half of the position.

A fixed amount of pips

The most popular approach among traders is to exit at a certain number of pips. But most of them do it
the wrong way. As you know, every market and every time-frame has different volatility. Moreover, it
changes over time. The right way is to find the optimal amount of pips by testing the strategy. This can
be simply done with Intelligent EA. Now, let's do it another way.

Candlestick reversal pattern

When a candlestick reversal pattern or an opposite divergence pattern appears, it is a good place to exit.
The reversal patterns signal that the trend is going to reverse or pause.

If the candlestick reversal pattern appears close to the first take profit level, but the order was not filled,
it means that the price has reversed from the support / resistance point prematurely. Then close the first
half of the position and don't wait until the price reaches the take profit level. Look at the next example.

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Moving average crossover

Here comes the big deal. Add the following indicators to the chart:

• Exponential moving average with period 34 (EMA 34) – the so called slow moving
average;
• Exponential moving average with period 8 (EMA 8) – the fast moving average.

The set-up is the same as in the Forex Candlestick Tactics.

The first look at the above example shows that the candlestick reversal pattern was somewhat better
place to exit. But there is much room for improvement. We were stopped from the trend by a small
correction, but the trend continues!

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When the price bounces from the slow moving average (red), you have a chance to re-enter the trend
and continue to make money.

Conclusion

• Divergence valley is a good place for taking a quick profit. Where most traders are placing their
orders to enter the market, we are doing just the opposite – taking a profit!
“Disregard the majority opinion. It is probably wrong.”
Max Gunther: The Zurich Axioms
• If the candlestick reversal pattern appears close to the first take profit level, but the order was
not filled, then close the first half of the position prematurely.
• Exit the second half of the position at the moving average crossover.
• We recommend to move the Stop Loss to protect your profits. A good place for a new Stop Loss
is where the price bounces from the slow moving average.

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 Chapter IV: How to filter false divergences

IV.1. The standard way

Traders that are trying to jump in the new trend need some confirmation. The trend reversal can be
confirmed with the divergence breakout. The divergence is confirmed when the minor support /
resistance is broken.

With such approach, the entry can be too far away from the start of the move and the risk can be too
high when compared to the profit. Our goal is to limit risk. We don't say that this entry technique is
wrong, but there is a way to achieve more consistent profits. Where most traders use to enter, we are
looking for taking a quick profit!

Www.ForexWinners.Net

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IV.2. The Golden Rule

Let's remind that sometimes the MACD histogram looks “choppy” – quickly reversing up and down
implying that market is in chop zone. This can generate a long series of false divergence signals.

To prevent over-trading, we have found a way to recognize the clear divergence patterns. Our Golden
Rule says that the Signal line must be crossed by the two peaks.

Valid divergence pattern Ignored divergence pattern

And you don't need to care about this, the Golden Rule has been already built in the Divergence Pattern
Recognizer!

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IV.3. The tricky way

Where to enter?

Our goal is to enter as soon as possible after the divergence pattern has formed. The Divergence Pattern
Recognizer gives a signal just after the “MACD hook” (the turning point). Only after the MACD hook
has formed, you will recognize the second peak on the MACD histogram. We recommend to enter on
the next candlestick's open. This is a simple, mechanical rule.

Professionals have found a more reliable method – using trendlines. Experience has shown that
trendlines can be used as a great confirmation tool for any trading strategy. If you already have a
trading strategy or you plan to learn more trading strategies in the future, think of implementing the
next steps into your system.

When looking for a long signal,

• draw a trendline on the chart by connecting the minor highs,

• place a buy-stop order just over the trendline.

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When looking for a short signal,

• draw a trendline on the chart by connecting the minor lows,

• place a sell-stop order just below the trendline.

When the price breaks the trendline, you are in! This entry is almost the same as the quick entry on the
next candlestick's open, but sometimes it protects from the false MACD hook when the MACD turns
again and continues to fall.

This is a bit discretionary, but most effective way to enter on divergence signals.

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 Happy Trading!

Risk disclaimer:

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree
of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully
consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a
loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

CFTC RULE 4.41 - Hypothetical performance results have many inherent limitations. No representation is being made that
any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences
between hypothetical performance results and the actual results subsequently achieved by any particular trading program.
One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.
In addition, hypothetical trading does not involve financial risk. Variables such as the ability to adhere to a particular trading
program in spite of trading losses as well as maintaining adequate liquidity are material points which can adversely affect
actual real trading results.

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