MACD divergence technology practical application
Before introducing the top divergence of and bottom divergence, let’s briefly introduce the MACD indicator. MACD is an indicator commonly used in technical analysis. It consists of three parts: MACD value (the red angle represents the MACD value is positive, and the green angle represents the MACD value is negative), DIF value (white line), and DEA value (yellow line). As shown in the figure below.
1. Top divergence refers to the fact that the index's closing price (note that it is the closing price, not the highest price set in the session) hit a new high, but the DIF value of MACD did not hit a new high. As shown in the arrow in the figure below.
2. Bottom divergence refers to the closing price of the index in a downward trend, although the closing price of the index is (note that it is the closing price, not the lowest price set in the session) hit a new low, but the DIF value of MACD did not hit a new low. As shown in the arrow in the figure below.
After clarifying the definition, I need to introduce it in depth:
1. Divergence level: K-lines generally have 5-minute K-line, 15-minute K-line, 30-minute K-line, 60-minute K-line, daily, weekly, etc. According to different cycles, the corresponding top divergence/bottom divergence is also divided into 5-minute level, 15-minute level, 30-minute level, 60-minute level, daily level, weekly level, etc. The corresponding adjustment/rebound period after the top divergence/bottom divergence of each level is generally 24 times that of this level after effectively forming . For example, the 5-minute top divergence is adjusted for 24 5 minutes, that is, about 2 hours, the 15-minute bottom divergence is rebounded for 24 15 minutes, that is, about 6 hours, the 30-minute top divergence is adjusted for 24 30 minutes, that is, about 3 days, and the 60-minute daily bottom divergence is rebounded for 24 60 minutes, that is, about 6 days. Of course, this is just generally speaking, the market trend is not really so accurate. Sometimes it may be stronger or sometimes it may be weaker. For example, the Shenzhen Component Index rebounded until December 23 after a proven low on September 15, 2015 and formed a daily-level bottom divergence, and ended. A total of 64 trading days were rebounded (calculated according to the aforementioned rebound level, the rebound caused by the daily-level bottom divergence should be about 24 trading days). In addition, it should be noted that the above rebound/adjustment periods are calculated from the highest point or the lowest point, and are not calculated from the time when we judge the effective formation of divergence. Because there is a certain lag in judgment.
2.Judge the effectiveness of divergence formation: Only when the peak of the latest wave of DIF is lower than the peak of the previous wave of DIF and the latest DIF value has a turning point (i.e., turning). Only then can you determine the formation of the top divergence, and then you should sell stock . For example, in a wave of rising market, today's closing price hit a new high. The DIF value of today's closing is 100, which is the peak of the recent DIF value, while the peak of the previous wave of DIF was 120, but it cannot be judged based on this that the top divergence has formed. Because it is possible that the index will continue to rise tomorrow or within the next two or three days, it will drive the DIF value to rise, which exceeded the previous DIF peak of 120. However, if the DIF becomes 99 and becomes smaller than the latest peak of 100 after tomorrow, it will turn around, then it will be determined that the top divergence is effectively formed. Correspondingly, only when the extremely low value of the latest wave of DIF is lower than the extremely low value of the previous wave of DIF and the latest DIF value has a turning point (i.e., turning). Only then can you determine the bottom divergence is formed, and you should buy stocks. Of course, this way determines the effectiveness of the top divergence/bottom divergence does not guarantee that you sell/buy at the highest/lowest point, which is to sacrifice part of the profit margin for certainty. Never try to sell or buy before the market gives a clear signal. If it is faster than the market, it will eventually be taught a lesson from the market!
3. The failure of divergence. The stock market is unpredictable, so no technical indicators can always be effective. Top divergence and bottom divergence will also fail. It is mainly reflected in three aspects:
(1): The formation of the top or bottom of the market is not accompanied by top divergence or bottom divergence.The following figure is the weekly K-line and MACD chart of the Shanghai Composite Index that hit a sharp rise in 6124 in 2007. From the figure, it can be seen that such a large-level high point does not have the weekly level top divergence structure. In fact, there was no top structure at the daily level at that time. If you are interested, you can check the daily K-line chart by yourself. So when the market does not give a top divergence/bottom divergence structure, we can only use the trend line to prevent the market from building a top/ bottoming . Trends are more important technical analysis methods than divergence structure. They are simple and direct, but the trend is relatively thick, because when the market falls below the upward trend line or breaks through the downward trend line, the market has already fallen or risen a lot. But the advantage of trends is that they won’t make principled mistakes.
(2) Deviate from the structure, it may encounter sudden and reverse movement of the market. As mentioned earlier, the corresponding adjustment/rebound period after the top divergence/bottom divergence is generally 24 times that of this level after effectively forming . But the market is unpredictable and it is possible to suddenly change the direction of movement. For example, on November 26, 2015, the top divergence structure was effectively formed on the 60-minute K-line of the Shenzhen Component Index, which should be adjusted for about 6 days. At that time, I shorted on stock index futures , but in fact, it only adjusted for 3 days and then rebounded up to a new high. It is correct to sell stocks or short stock index futures when the 60-minute top divergence is formed on November 26, but it is a principled mistake I made when the index hits a new high. Later, it was not cleared until it lost more than 10%. The correct operation should be to correct the error immediately after the index hits a new high and buy back the stock position you sold. Although the index hit a new high now and did not rise much further, this was after the index hit a new high, and it was impossible for you to know how big the index would rise at that time.
(3) may encounter multiple deviations. When the market is extremely strong or extremely weak, it may form multiple top divergence or bottom divergence structures. For example, in the decline in January this year, there were three 30-minute bottom structures. Although the first two 30-minute bottom structures rebounded briefly (but the rebound time was less than 3 days), they both hit new lows later. When it was the first time that the 30-minute bottom divergence was formed, I bought it. Fortunately, the position was relatively light, and then it gradually increased the position of and when it was formed every time the bottom divergence was formed, so that it was able to make a profit of 10% when the rebound came. Sometimes the market will also have multiple top structures, so I won’t give an example here. Although it is possible for the market to experience multiple top divergence/bottom divergence, in terms of operational principle, you cannot wait until the market has a second or third top divergence/bottom divergence structure before selling or buying, because when the divergence structure is formed, you do not know whether it will form again later. The correct operating principle is to form a top/bottom divergence structure and sell/buy immediately. If the market hits a new high/low in the future, you must correct the error and buy back/sell. Many people may be reluctant to correct mistakes, but the market is so cruel that you won’t make money comfortably every time.
Many people may lose interest in divergence structure after reading the above three situations, and think that studying divergence structure is useless at all. But I want to say that divergence from structure is still a very effective technical analysis method, and the probability of the above three situations occurring is relatively small. In the stock market, no analysis method is 100% correct, and no one can judge accurately every time they judge the market trend. For example, the trend line analysis method is of high importance and accuracy, but in a wave of fluctuations, if you use the trend line method to operate, you may be slapped on both sides. However, the role and accuracy of the trend line cannot be completely denied. The difference between the stock market and gambling is that if you want to win gambling, it depends entirely on luck, while if you want to make a profit in the stock market, it depends on probability. You only need to insist on taking action when an event is likely to occur to ensure that you are profitable in the long run. Only by paying attention to every top structure can you escape the top, and only by paying attention to every bottom structure can you get to the bottom.
Finally, it is recommended that you try to ignore the top divergence/bottom divergence structure below the 60-minute level in actual operations, and only make the top divergence/bottom divergence structure at the ≥60-minute level to reduce the number of operations and ignore small fluctuations. Because it is difficult for you to make profits for when the volatility market below the 60-minute level. The two examples I mentioned earlier that I failed in operation are also hope that everyone is full of awe of the market and do not expect to grasp every small fluctuation in the market. That is unrealistic.
