A Good Level Beats MACD Divergence All Day

This morning I’ve been looking for scalping opportunities on the lower time frame EURUSD chart. I’ve reinforced my opinion that the number one priority when looking for trades is identifying significant levels. The MACD is at best a lagging indication tool for momentum change, and at worse can actually hamper your trading decisions by creating doubt and distraction to what really matters.

EURUSD 4-hour time frame

A reminder of where we are on the EURUSD. After making a double top at our local high on 4th November we’ve dropped and tested 1.10628. This level is our 2-weekly swing high of our significant recent low. It also has clear significance on this 4-hour chart being the swing-high of our down-leg which made the local low of 1.09913.

I am expecting price action to drop further and start testing levels in the yellow shaded box and hit a more precise leg-start.

But for now I’m looking for more local scalping opportunities around current price action.

EURUSD 15-min time frame

In the above chart I have highlighted the 15-min candle which made our low. The final leg down is marked with the purple arrow.

This is all basic stuff and was draw out on 6-Nov 12:45 (prior to white vertical line).

At this stage I am not certain where we get our reaction, or indeed what is the ‘true’ leg start (swing-high before our low). I usually plot a couple of options (the green marked lines) and observe price action as we approach each area of interest looking for clues such as patterns or divergences.

Another way to identify our ‘true’ leg start is to seek higher time frame confluence.

EURUSD 1-day time frame confluence

Here we can see a highly significant area of congestion on the daily chart (yellow circle). I have plotted 3 purple levels from the area. We can now return to the 15-min chart to see how they line up.

It’s amazing how precise the higher time frame purple levels match our local green level. They are basically the same (1.10802, 1.10801, 1.10800). This tells me that the first time we hit 1.10801 we should get a significant reaction. Remember this analysis was done prior to 12:45 (vertical line).

One thing to note, why not consider 1.10753 as our significant level? We could have probably found higher time frame confluence here also. The simple answer, which one do we hit first? We are playing first-touches, so although both levels are important, we play the one we hit first, only on first-touch. 1.10753 may still be significant in the future as it remains untested, but for now we play what is next.

You can already see the reaction we got as we tested this level. But that of course is hindsight. Lets discuss a couple more important points about this setup and reaction.

Firstly, getting a perfect entry is near impossible. We have identified a 15-min level (lets call it) that we are happy with, but you will notice we actually wicked quite significantly down to 1.10773. When scalping lower time frames every point is important. How could we have been more precise? We can look for lower time frame levels. This wick down would have hit something in the low tick charts. So where do we put our entry? To be honest I was happy to take a 3-point draw down. Our stop-loss was never under threat, at the 1.10723 level (slightly different on 6E futures chart, but the equivalent level).

Second and most importanty…

Why Didn’t I Take The Trade?

MACD is the reason. I had everything plotted, a nice tight stop-loss, check. A significant level with higher time frame confluence, check. Lower time frame progression, check (trending upwards, testing previous highs). Everything was making sense.

I even entered and removed my orders from the DOM 3 times!

Ninja Trader cancelled orders report

This clearly shows hesitation from 12:46 to 13:08 as I enter and remove my buy-limit and stop-market orders. The bottom 2 cancelled orders were lower levels I wanted to buy at incase we dropped further, but I had well and truely missed the boat by then.

Here is the 6E chart I was using on Ninja Trader to identify my levels (slightly different prices, but equivalent levels which all had higher time frame confluence like the spot-price).

6E 15-min time frame on Ninja Trader

So, back to the MACD and the ultimate reason for cancelling my entry 3 times. I was waiting for MACD divergence on at least the 133-tick chart or even 1-minute chart. But it never came, prior to the pop.

6E 1-min time frame showing no MACD divergence
6E 133-tick time frame showing no MACD divergence

In real-time this is pretty scary, the doubt creeps in. I mean we at least want to see some divergence on the very low time frames right? But nothing, despite everything else being perfectly set up.

One of the times I removed and re-entered my order I remember thinking to myself:

  • Ah no MACD divergence, lets just wait until we see something (remove order).
  • Wait a second, everything is perfect, I love this level so much, screw the MACD (add order).
  • Oh but we can just plummet here, absolutely no sign of a reversal, no patterns either (remove order).

The moral of the story. Levels are the single most important thing you can look at. Find a good significant level, everything else will fall into place. Even if we are dropping like a rock with no signs of slowing momentum, if the level is truely significant and makes sense, we WILL get a reaction.

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