Bullish and Bearish Stochastic RSI MACD technical divergence trading strategy

Discussion in 'Trading Strategies' started by Customer Questions, Oct 27, 2014.

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  1. Customer Questions

    Customer Questions John @ timetotrade

    I want to create an alert to identify Bullish and Bearish Stochastic, RSI and MACD divergences; for example a bearish RSI divergence is when the previous peak on RSI is lower than recent peak.
     

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  2. Customer Care

    Customer Care John @ timetotrade

    To identify a divergence between indicators, the approached discussed in the following thread can be used:

    http://forum.timetotrade.eu/threads...higher-high-and-price-makes-a-lower-high.364/

    The basic approach is to determine the highest and lowest MACD, RSI and Stochastic values within a time frame of for example 1 hour. Alerts are set up to trigger if one of the indicators sets a new high or low while the other(s) do not.


    A custom indicator has been created to determine the Highest High and Lowest Low value of the RSI, MACD and Stochastic over the last hour using a 5 minute interval candle, using the approach discussed in the above thread. It can be imported using the following code: D0FF-BFB4-0F26

    Click on the following link for help importing custom indicators: http://forum.timetotrade.eu/threads/custom-indicators.183/

    The following is a screen shot of the custom 'Technical Divergence' indicator that can be imported using the above code. The Stochastic %K value is being used, along with the MACD to make it easier to see the trends. If you wish to include the Stochastic %D or the Smoothed MACD, then modify the chart settings to include the Stochastic and MACD Group.

    MACD RSI Stochastic Technical Divergence.png


    Alerts can now be set up to detect bullish and bearish divergences between the indicators. For Bearish Divergences the requirement is for the MACD to be above its MAX MACD and for the RSI and Stochastic to be below their MAX values i.e. the faster moving leading indicators diverge from the trend of the slower moving lagging MACD. Three triggers will be added to the Bearish Divergence alert where by the requirement for each indicator is:

    • MACD above MAX MACD
    • RSI below MAX RSI
    • Stochastic %K below MAX %K

    Use the 'crossover' triggers to create alert triggers based on the custom indicators, and then modify the alerts to check if 'above' or 'below' as illustrated:

    upload_2014-10-27_12-37-52.png


    upload_2014-10-27_12-38-22.png

    upload_2014-10-27_12-39-43.png


    Group the alert triggers with the requirement that all of the alert trigger conditions are true at the same time:

    upload_2014-10-27_12-44-41.png

    To learn more about Grouping and Sequencing triggers: http://wiki.timetotrade.eu/Triggers_and_Groups

    Enter a message to remind yourself why the alert was created, set your notification methods and the reactivate time frame, if the requirement is for repeated alerts. To prevent repeated alerts after the initial divergence consider setting the reactivate time frame to for example 1 hour.

    Once the alert is Activated or Paused it can then be back tested to check that it has been set up correctly:

    upload_2014-10-27_12-46-9.png


    The alert can also be used to execute a simulated or real trade. In the following example a Forex trading strategy will be tested based on selling when the alert conditions are met with a 20 pip profit target and 40 pip stop loss:

    upload_2014-10-27_12-49-12.png


    Go to the 'Backtest' tab to backtest the trading strategy:

    upload_2014-10-27_12-48-34.png


    In this example that strategy was most effective when the market trend was bearish:

    upload_2014-10-27_12-48-49.png


    To learn more about back testing: http://forum.timetotrade.eu/threads/how-does-the-back-testing-work.80/


    For Bullish Divergences the requirement is for the MACD to be below its MIN MACD and for the RSI and Stochastic to be above their MIN values:

    • MACD below MIN MACD
    • RSI above MIN RSI
    • Stochastic %K above MIN %K

    Follow the above steps using the MIN values to create the Bullish Divergence alert.


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