Step #3- Divergence Use Fine Tune Entry & Exit
Step 3 is when most traders become confident that they understand the best entry patterns based on Fibonacci and trigger line continuation and termination conditions. Focus now shifts to learning the divergence and management concepts.
At this point, we need to give meaning to the different situational occurrences of divergence. Divergences with Fibonacci and Trigger Line patterns will be the core of all entries and trade management.
First, what is divergence? Divergence by Nexgen is determined using automated Fibonacci retracements between price and a MACD indicator. In 2003-2006 we used to use the actual Macd indicator to find divergences manually. T3 Macd BB lines are still one of the indicators in your toolbox, although it is not used in our plan. Today, the process is automated and will appear as a negative number on the chart with a %. The "size" of the percentage does not matter. Think of divergence as TRUE OR FALSE, not degrees of divergence. The Fibonacci and trigger lines will help us determine the strength of the divergence and how to use it. Divergences will plot magenta and cyan lines that are used as entry or exit areas.
The first use of divergence comes to us in the trend trade rules. "when divergence is true on a 5-1 chart, wait for a T3 Market flow signal before entering a trade. In its purest sense, this is a TRUE OR FALSE RULE which is illustrated below. This rule may be bent, broken, or ignored depending on several factors you have learned in Steps #1 and Step #2. VERY STRONG TRIGGERS, GREAT TOPS, OR BOTTOMS may give you opportunities when you can ignore this rule. We will look at many examples. Let us look at the rule as written. If no divergence is true on the prior 5-1 pivot, enter at the spot. If divergence is true, wait for a confirmation signal generated by the T3 Market Flow indicator.
One such example of Fibonacci and Trigger line configurations that will allow you to IGNORE the market flow signal requirement is ZERO trigger line weakening before a trend trade. The picture below is taken from the quick start video on the educational page. As you can see reading the trigger line strength and direction as ultra-strong, it does not make sense to pay extra for confirmation. This trade fits the trend trade rules and is also in alignment with the MOMENTUM TRADE RULES.
Even when a market flow signal for entry is not required, the market flow signal is still beneficial to our management. Trade management and stop placement before a 5-1 reversal bar is true may be adjusted just below a market flow signal to reduce risk. 2-3 ticks will be the max risk beyond a market flow signal, high or low.
Divergences may help you with entry signals. They may cause the market to pull back to the entry area, such as a Fibonacci or prior divergence magenta line. Other divergences such as multiple divergences that cause the trigger lines to roll against the trade or change background colors on the 5-1 chart may force an exit of an existing trade. Typically most traders will take prior divergence areas as a 1st profit target and reduce risk on the remaining position.
A similar situation involved a HIGHER / LOWER second divergence and the 8-range trigger lines rolling. If the triggers roll against you and you have a 2nd divergence that makes higher high or low management may be needed on this position. If you have the perfect entry with only 2-3 ticks risk, it doesn't make much sense to jump out, stay in and hope for the best. If this situation happens and you are up more profit, you may opt to take 1/2 off and get to break even. When GOOD TOPS / STRONG TRENDS are present, you may opt to stay in. If the prior top or bottom was "not good" exiting is usually best. You must develop a true contextual awareness of the market you are trading to trade at the highest level.
Market flow patterns such as a yellow-white combination with a single 5-1 divergence will also alert you that you should wait for a market flow signal before entry. This is VERY COMMON in strong trending days after a "bad bottom" is in place (step #2 work). This look will resume the prior trend. Again highlighting the importance of the Tops and Bottoms video on the education page.
A traditional Head and Shoulders pattern has been used profitably for decades in technical analysis. Nexgen users add power to this pattern when adding Fibonacci, trigger lines, and 3 divergences in a relatively tight range. This highlights the traditional head and shoulders pattern and serves as an absolute termination or reversal of the market. If in a trade. GET OUT!: if not in a trade, look for entries that fit rules. This pattern is VERY COMMON at the HVA TRADE entry zones.
The following is an example of several assertive entries ideas, based on termination conditions. Typically, this type of trading will be instituted after you have become a very profitable trend trader and looking for additional entries that out outside the scope of the trading plan trades.
Sometimes divergences and pivot stop-outs of divergence highs at Fibonacci areas will be entries. This look is discussed as an entry type in the Trade Management Video on the education page. If the conditions are true to attempt an edge trade, the following pivot stop-out of a divergence high will serve as a powerful entry technique. This type of entry is also discussed in the Trade Executions Video in the trading plan.
Sometimes a VERY STRONG TREND - PARABOLIC TREND TRADES will be active. When this is the case, you will not need confirmation signals to take a trend trade. It is also worth noting that when the 8-range triggers, small and large remain very strong, do not let a divergence force an exit.
Even in a parabolic strong trend, you must still pay close attention to prior divergence highs and lows when the 5-1 background color is opposite of your trade. Exits at this divergence low will be taken on the way back up with an up bar ( just in case it keeps going) also a great first target, risk reduction area.
The following video covers the many great trading patterns but also spends a lot of time with divergence education. This video was recording during one of our live classes on March 17, 2021.
