Trading Divergence

[BBand]

Re: Reversal Swing Convergence Divergence

Hi Tech
I'm certainly not looking for any confrontational stuff - too old for that

BUT

My definition of a divergence seems to be a bit different from yours
Just keep it simple, and reference regular divergence, ie bearish or bullish. Hidden divergence is a bit different.(trend continuation)

Regular divergence
When in an uptrend, we compare the price highs with the indicator highs. if there is a deviation, then we expect the price to move in the direction of the indicator divergence
In a downtrend we compare the price lows with the indicator lows, any deviation - we expect the price to move in the direction of the indicator

Soooooooooooo
In your example above the 1st divergence did work - was not a great move, but it did move down, I would have had a profitable trade there
You seem to be comparing high pivots with low pivots??
Maybe thats why your results were not that great

Your second example, I would not even look at, I would treat it as a pattern

As we know it is easy to find a setup that works and one that doesn't.

The good part with divergence is that it gives tight stops and you soon know if your "analysis " is correct - no waiting around to see if something is going to work or not.

Anyway, that's how I see it.
My interpretation works for me

Keep smiling
Peter
Wish I could see that chart again, I do not like challenging you - you are usually correct - anyway I'll hit the submit

 

[tech/a]

Re: Reversal Swing Convergence Divergence

Here are a couple of examples I found on a chart---first one I pulled up.
Would you trade the current diversion?
How about the one before it?

So back to the discussion.
Would you think this is a good divergence?
Or how about these 2.
So of the 3 pick the winner/s
Ill bet we get less than 50% right.(As in number of people who get it correct.).
And thats just as an entry.
Wont give the answers until at least 10 people choose.

Forget the $500 just do THIS as an exercise.

Pete I see your point but really if your going to trade a move like that from a divergence---you have to be kidding!
How would you set the exit!

 

[BBand]

Re: Reversal Swing Convergence Divergence

Hi Tech,
They are both moving in the expected direction just nowwwwwww

Whether you exit with a profit will depend on your trade management (I use indicator S/R levels - which I do not intend disclosing)

Its something that I discovered after a LOT of chart time and I do not intend giving it away just to prove a point.

But the bottom line is diversion works for me and that's all that matters

Have a nice day
Peter

 

[BBand]

Re: Reversal Swing Convergence Divergence

Tech,
There's no fool like an old fool (me)
but just could not resist ------------

Looking at your first chart.
The highest point of the price is giving a bearish divergence - what happened?

and the lowest point of the price is also a bullish divergence - what was the outcome?

On your second chart
The two price pivot highs could technically be classified by what I think is termed a class 2 diversion - what resulted?
Personally I would not have taken that trade

Hind sight analysis - yes, but then again I suspect so is yours?

Same again
Have a nice day
Peter

PS I only take trades which are obvious, I do not look for a reason to "find" a trade

 

[tech/a]

Re: Reversal Swing Convergence Divergence

So Pete for clarity.
(1) The divergence is not clear in your view so no direction.
(2) You feel this would have failed
(3) ?? cant see an opinion.

Just so I can prove a point after we get 10 or so verdicts.

 

[It's Snake Pliskin]

Re: Reversal Swing Convergence Divergence

So back to the discussion.
Would you think this is a good divergence?
Or how about these 2.
So of the 3 pick the winner/s
Ill bet we get less than 50% right.(As in number of people who get it correct.).
And thats just as an entry.
Wont give the answers until at least 10 people choose.

Forget the $500 just do THIS as an exercise.

Pete I see your point but really if your going to trade a move like that from a divergence---you have to be kidding!
How would you set the exit!

Tech,

Just going by your charts on post 22:

1. The price continues up.
2. The bearishness is confirmed.

I'd love to see some volume bars though.
Thanks

 

[BBand]

Re: Reversal Swing Convergence Divergence

Hi Tech,
I give up!!
We are not on the same wavelength, so we are wasting each others time

Its getting late - posted this on another thread by mistake, time for bed

Have a good day to-morrow
Peter

 

[tech/a]

Re: Reversal Swing Convergence Divergence

We are not on the same wavelength

If by my stance of attempting to prove that trading divergence is no more profitable than random---then yes. At least I'm putting up examples from which a conclusion can be drawn---albeit in a small sample set.

so we are wasting each others time

This maybe your opinion but not mine. If i can get traders to look into their beliefs and question whether they are proven or just home grown ideas---then Ive not wasted anyone's time.---or money.
Divergence

 

[tech/a]

Re: Reversal Swing Convergence Divergence

Hell

Ive scared everyone off!

There is an important message I'm going to be able to put forward with relation to this topic and will be more pertinent if a few others become involved.
Maybe not as obviuos as some may think.

So how do you think the divergence setup on the 3 charts will play out.

Thanks Snake and Pete for your replies so far.

 

[wayneL]

Re: Reversal Swing Convergence Divergence

FWIW

1/ Because of the way stochastic is calculated, I don't think stoch divergences are worth a cracker.

2/ I don't really put much stock into them myself, but if I were looking for them I think I'd pay more attention to bullish divers... certainly on daily charts.

3/ I would use a MA based oscillator such as MACD if I did... or RSI.

....just to keep the thread alive really.

 

[eunza]

Re: Reversal Swing Convergence Divergence

Hi Tech/A - No not scared off - just only access forums every now and then.

To be honest I would not trade most of the charts you posted at that point in time - The way that I trade only leans to certain setups (most of the time these are during a period of low price movement after high volatility)

I'll usually look through dozens of charts before looks like it could be beggining or showing signs of a 'breakout' so possible trades are few and far between. This is a weakness in my strategy that I can only trade a small % of current price movements. However overall it is profitable for me.

Just wondering - Are these charts you posted from current SP charts (as in were they up to the minute when you took the screenshot?) or have you selected specific patterns to prove a point?

I would be interested in putting in hypothetical trades entrys and exits in a real time scenario if you were keen to prove methods. IE. pick a bunch of stocks and list at that point in time if you buy or sell and tally up the results.

Hell

Ive scared everyone off!

There is an important message I'm going to be able to put forward with relation to this topic and will be more pertinent if a few others become involved.
Maybe not as obviuos as some may think.

So how do you think the divergence setup on the 3 charts will play out.

Thanks Snake and Pete for your replies so far.

 

[professor_frink]

Re: Reversal Swing Convergence Divergence

Don't really have much of an opinion on the first 2, but the last one looks worthy of further investigation, mainly as a SR play. Though that last bar is slightly concerning IMO for any long trade.

As for the divergence involved, I wouldn't have classified that last chart as anything I'd be interested in, if it had of been an ABC type correction with a higher low forming on the oscillator as price formed the LL, then it may have looked a little more interesting. Sort of like the 2nd chart has, but I'd want to see it occur over a longer period of time, if that makes sense.

 

[pistol72]

Re: Reversal Swing Convergence Divergence

i like to use divergance as an indicator .i see where you are coming from pete,i prefer to use the RSI but have traded sto divergance aswell.bieng selective is key and not use as stand alone.
tech how about examples of some triple divergance with stocks that have been in a long term down/up trend.i find that something generally happens after a D.hopefully a chart
P

 

[It's Snake Pliskin]

Re: Reversal Swing Convergence Divergence

FWIW

1/ Because of the way stochastic is calculated, I don't think stoch divergences are worth a cracker.

2/ I don't really put much stock into them myself, but if I were looking for them I think I'd pay more attention to bullish divers... certainly on daily charts.

3/ I would use a MA based oscillator such as MACD if I did... or RSI.

....just to keep the thread alive really.

Have to agree.

The chart examples above are not useful.
And I think we should get back to letting Eunza to continue with his RSCD.

 

[BBand]

Re: Reversal Swing Convergence Divergence

Hi Tech,
I must admit that I take exception when someone asks for proof of any statement which I may make, or offer to place a bet - to me that's shows lack of respect (I'm old school and to me thats not acceptable)

I have nothing to gain from posting here and anyone who believes ANY methodology given on the internet would be very foolish not to prove it for themselves before committing any of their hard earned cash to the market

Anyway here's my proof so that there is no unfinished business:

How do I know my strategies work?

I test all my strategies MANUALLY!! I have A4 folders full of charts - each having approx 10 trades - including losers.
Its time consuming work, but the outcome is that I know my strategies extremely well, and in the process of compiling my chart books, I had the opportunity of observing recurring patterns, both positive and negative

I know that most of us would not commit to this or have the time, but if possible - I would highly recommend doing it

The stocks were picked at random from my trading universe and for each stock I marked up the weekly and daily charts. The weekly showed the week before the setup appeared on the daily and the daily was marked up to show the trade and any points in particular that I found interesting, and the % win or loss for each trade
On the back of each chart I summarize that the results of the trades and their type

I only trade long (from the daily) and proved that I can expect to make money in any kind of market, just that when the weekly is in an uptrend I can expect to make larger profits, and the reverse when the weekly is down (surprise surprise)

I am very wary of taking long trades when the weekly is down, after getting good results in chart after chart - I hit one where I did not get even one winner!

Now I don't even bother taking any trades when its weekly chart is down

Every weekend I check to ensure my trades are still working. I scan for each type and depending on the numbers received from the results I can tell when a trade type is starting to tail off and another picking up. Once you are organised, it does not take much to keep your finger on the pulse of the market

Maybe its my trade management that helps make me profitable. - its very strict with the aim of not letting a winner become a loser. I,m only in a trade as long as it is moving in "my" direction i.e trending

I use tight initial stops - the low of the signal bar
My entry - price must take out the hi of the signal bar
Trade management - I use 3 stops whichever one is hit first is the exit
I use indicator S/R levels as my trailing stop
I have a time stop- if I'm not in profit after two bars I exit (sometimes price pokes above the high of the signal bar then drops back into the body of the signal bar) or I have an entry signal but price does not take out its high within two bars.
The last stop is an indicator stop

The above may sound complicated but in reality its quite simple, all stops are documented in my trading plan so once in a trade - its just a matter of following the rules

I am often taken out of a trade early - but thats not a problem, I can always reenter

In a bad trade, I aim to get out before my stop is hit (just like Tech)

By the way my charts show the type of trades as they occur - I don't have one for divergence, one for........... etc

My trades last from 1 day (out the following morning) to weeks

Oh and there is another thing regarding exits - if on the day following my exit signal, price does not drop below my exit bar low - the trade stays open

Thats all I can think of, hope it makes sense - too long to check, I'll just submit it

Have a nice day
Peter

PS I agree with Wayne, the Stochastic is not much use for defining divergence. I have 4 indicators on my screen all the time, never changes, but only one is in use consistently, each of the others is used for a particular feature

Thats it easy to trade and keep up to date (once you do the initial work)

 

[sinner]

Re: Reversal Swing Convergence Divergence

So how do you think the divergence setup on the 3 charts will play out.

I would like to contribute.

First of all, I think if you want to trade a divergence, then you need to ask yourself what is the indicator that I am using showing a divergence of? Are you trading a momentum divergence? What are you expecting, aside from the possibility that momentum will slow down in the current trend or reverse in the current trend? Because that is all a momentum divergence shows.

CCI, AD/OBV, ROC, etc many indicators show divergence but not all divergence was created equal nor were they meant to be. All divergence trades rely entirely on the traders understanding of the indicator in questions' equation and what the visual representation we know as divergence means in that case. CCI will be useless to you unless you have done some work quantifying the average length of a cycle for example.

The Advanced GET trading manual is designed to reduce many complex EW concepts into just a few very simple ideas which work often enough over a large spread of trades. Momentum divergence (with some caveats to make sure you are trading the end of the right wave) is profitable enough that they included it in the manual.

I direct you to chapter 11 on this page - the section titled "Rules for type 2 trades":
http://www.esignallearning.com/members/getManual.aspx

There are about 12 pages worth of examples, roughly half of which are type 2 (i.e. mom-div) trades.

 

[tech/a]

Re: Reversal Swing Convergence Divergence

Firstly.

Pete you are an exception and one of the only discretionary traders I have heard of who keeps a trade log.
I don't know that that log has calculated Strings of wins or losses,expectancy---overall or each discretionary setup---if you have repeats. but if your a serious discretionary trader this info is in valuable.

If you own STATOR it will give it to you if you record trades on it.
In fact you can label many discretionary methods and basically forward test what your doing.---LIVE!

I advocate that a very large majority of people who trade technically "think they know how their analysis will play out.
When in actual fact it doesn't matter how it plays out if you have information like Pete "possibly has".
He may know that placing 100 trades he will return 60% winners at an average return of 4R. By trading X discretionary method.
He sets a buy and a stop and the rest just happens.

See----I hear above----(Posted) all sorts of reasons why the above examples are just not good enough,lack info,wrong type of divergence--only TWO bothered to have a go. Both would have taken their trades and been stopped out. I find it remarkable that not ONE person picked ONE divergence correct---most didnt even try!

Of the 3 trades shown 2 were winning trades and one a loser.
In other words 66% success rate.
If you took the trades and set a stop you would have started with a 66.6% win rate ---how much you made would depend on your stop and exit points.

Much is espoused as known when in fact it really isn't.

Take High volume always preceedes a breakout.
Wanna take bets on how profitable that one is!

You can filter tinker add to and alter the type of divergence in finitum but I will still give Joe $500 if anyone can post 20 trades here R/T using divergence as a foundation indicator and out perform the index over the same period.

In my view if you really have an edge in your trading you will have a method which rarely drops below the Mean of the index in fact it will be well above it with its own mean of performance. Pretty well always.Long and short term.

Now a divergence method you would think would work brilliantly in this non trending market.

To the charts
Click to expand.

 

[It's Snake Pliskin]

Re: Reversal Swing Convergence Divergence

I would like to contribute.

First of all, I think if you want to trade a divergence, then you need to ask yourself what is the indicator that I am using showing a divergence of? Are you trading a momentum divergence? What are you expecting, aside from the possibility that momentum will slow down in the current trend or reverse in the current trend? Because that is all a momentum divergence shows.

CCI, AD/OBV, ROC, etc many indicators show divergence but not all divergence was created equal nor were they meant to be. All divergence trades rely entirely on the traders understanding of the indicator in questions' equation and what the visual representation we know as divergence means in that case. CCI will be useless to you unless you have done some work quantifying the average length of a cycle for example.

The Advanced GET trading manual is designed to reduce many complex EW concepts into just a few very simple ideas which work often enough over a large spread of trades. Momentum divergence (with some caveats to make sure you are trading the end of the right wave) is profitable enough that they included it in the manual.

I direct you to chapter 11 on this page - the section titled "Rules for type 2 trades":
http://www.esignallearning.com/members/getManual.aspx

There are about 12 pages worth of examples, roughly half of which are type 2 (i.e. mom-div) trades.

Sinner,

Thanks for the balanced and informative post.

I agree there are many divergence / convergence ways so to speak.

Cheers..

 

[wayneL]

Re: Reversal Swing Convergence Divergence

I think it's a bit foolish to just look at any old divergence and use them as signals. Questions need to be asked first... apart from "does it work?".

1/ Why does it work

2/ What is it the indicator measuring

3/ The the divergence on the indicator reflect the theory

4/ Are there other extraneous influences which may invalidate the divergence

etc etc

The fact is that proper divergences are showing a slowing/weakening of the momentum of the prevailing trend.

For this we need a momentum indicator such as MACD and why the stochastic oscillator is useless (as it measures the price relevant to a range).

To understand divergences and what is happening, you need to be able to understand what the oscillator is measuring, how it is constructed (there is a thread on this) etc. In this way once an oscillator divergence "alerts" you to a possible slowing of the trend momo, you can view the price action to determine whether this fits the theory.

The key is in understanding the indicators and what they are actually showing you, if anything.

 

[tech/a]

Re: Reversal Swing Convergence Divergence

Crazy arguement.

The Charts show a positive result!!!
Here is MACD pretty close to the same.

Give me evidence that one form of divergence out performs another.

Then show me where ANY form of divergence as a foundation indicator consistently out performs the mean of the index.

Add whatever filtering system additional indicator you like---but show me---if its that obvious then it shouldnt be that hard.

Infact give me a list of conditions to be met and I'll find 20 charts that fit the criteria---post them up and see how they go.

So just bullet point the conditions and variables.
EG
. MACD
.Rising volume
Whatever you tell me.(meaning anyone who wishes to contribute)

I'll go to all the effort and if it out performs the index then I'll even send Joe $500---so I'll do all the work and take all the risk-----

Charts using MACD (Same ones)