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Enigmatics

Combining Divergence with Reversion Strategies

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Decided to create this thread for the simple reason that as traders we're like scientists ..... it is our responsibility to attempt to poke holes in our own "theories" (aka trading styles) so as to prevent confirmed bias that will inevitably lead us astray and our accounts dry. I'm open to all kinds of opinions and since I don't have trading peers in real life, so I come to place like this. That comes with one caveat though. There seems to be a lot of time spent by certain posters showing up in threads just to proclaim their market saavy, not really intending to offer up any tangible advice. Please refrain from any of that. I get it, you've worked hard and do not feel compelled to "share" so to speak.

 

My style has been an evolution. It inherently is born from my desire to NOT chase price. I have been relentless in my pursuit to "understand" (over 7000 hours trading/studying) and that has led me further down the rabbit hole covering studies involving VWAP, Volume Profile, Market Auction Theory, Divergence, Wyckoff, Mean Reversion, and Volume Spread Analysis. Obviously a lot of "volume" related concepts right? That is primarily because I've never been any good at price-only trading. Volume helps me identify supply/demand and "validity" of movements. Another reason this style has evolved the way it has for me is I still struggle trading near the open. I have not been able to do it consistently for quite some time. I certainly would like to, but I digress.

 

I use divergence to spot potential reversions to VWAP or volume POC's (Points of control) from the "extremes". It is my opinion that these two areas act as magnets once supply/demand run out. The divergence must be confirmed via the volume and there typically must be a trend line break. Probabilities for success on these trades are obviously going to be higher on bracketing days than trending days, but from observation the days where we don't retrace to one of those two levels is few and far between. That being said there still must be enough "juice" to make it worth the squeeze, so if there isn't enough potential I just avoid it.

 

The following is an example of a trade I took on June 6th. There was actually quite a bit more upside to this trade as there was confluence in the high time frames, but I just want to focus on my trade.

 

1. Selling Climax occurs giving an indication of possible seller exhaustion

2. Stop volume forms with a long lower wick (sign of potential absorption of supply by pro's)

3. Price bounces off the SV (called an automatic reversal)

4. The action pulls back and then retests the bottom on lighter volume (called "secondary test of supply")

5. The test is successful as no new major sellers show up, giving a signal to the intraday bulls to take over

6. The top trend line is broken (this is absolutely crucial so as to not enter a false rally)

7. Target at this time was VWAP/POC as they were both the same. If POC was before the VWAP, then you scale out at POC first.

 

T2ORcPk.png

Edited by Enigmatics

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My trade on the SPY today ....

 

1. Waited out the dip from the opening session highs.

2. Demand came in around 11am EST

3. I waited out that first bounce (the automatic reversal) to see what kind of reaction it would get on the dip from sellers

4. Sellers clearly lightened up ("no supply") as we re-tested the 159.30's where lots of lower wicks were and positive divergence formed

5. I then entered on the break above the TL, albeit I really wanted to enter at the "no supply". I'm trying to be prudent with these instead of greedy trying to capture every cent.

6. Target initially was VWAP, but I held thru as no real sellers turned up there. 2nd target then became the opening price of 159.87. The intraday POC ended up shifting up to that level where I exited.

 

DAX has held strong on the day which also added some confidence to my long. Max target would've been the HOD today but I just didn't have the balls to hold to that.

 

 

4SReti2.png

Edited by Enigmatics

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DAX has held strong on the day which also added some confidence to my long. Max target would've been the HOD today but I just didn't have the balls to hold to that.

 

Damnit .... there it goes, almost back to HOD. :crap:

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Here is how i would have traded this major trend reversal. First i would have drawn my trend line a bit different (see dark purple trend line). Once I took a position i would like to swing it for at least two legs. Maybe then take some off and let rest swing until PA indicated time to exit. I don't use POC, VWAP, or divergence so my chart would be pretty much naked except for a 20 EMA and an 89 SMA.

image.thumb.jpg.5b9316e9172f8ac0c087073e3a7c3611.jpg

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Nice charting platform. What is it?

 

It's Stockcharts.com

 

My actual trading platform is Tradestation ..... but I'm so attached to Stockcharts (have had it for nearly 3.5 years) that I use a combination of the two. It's just so easy on the eyes. The other reason I use it is Tradesation only offers Volume Profile (aka "Volume by Price") for the intraday via what they call their "Matrix" .... so I'm out of luck if I want to back out of a chart and look at Volume Profile via longer time frames. I found an indicator created by BlowFish that plots the current and previous day's volume POC on Tradestation though, which is kind handy.

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It's Stockcharts.com

 

My actual trading platform is Tradestation ..... but I'm so attached to Stockcharts (have had it for nearly 3.5 years) that I use a combination of the two. It's just so easy on the eyes.

yes it is, that is kinda of what attracted me to it in the first place..clean looking ...even though you trade with more than i do.

 

One clarifiction on your chart i annotated. On the entry i would enter on any bar that breaks the high of the first bull bar after the test but i would prefer that bar to of course be another bull bar as it was in this case. If not, then i would still take the trade ( say it ended up being a bear bar) but be ready to exit quickly if things went different than i expected.

Edited by Patuca

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What do you trade with?
PA with 2 MA's....20 EMA and an 89 SMS. AND i use volume bars at bottom mostly for confirmation. I also consider spread on the bar and whether bullish or bearish. Basically correlate VSA principles with PA.

 

I watch closely for patterns such as triangles..pennants...flags..trendlines..channels..etc.

 

I generally keep my chart clean of indicators except the ma's. Will mark it up with patterns as day unfolds so by end of session it may be all marked up but i start with candles and two MA's and vol at bottom.

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PA with 2 MA's....20 EMA and an 89 SMS. AND i use volume bars at bottom mostly for confirmation. I also consider spread on the bar and whether bullish or bearish. Basically correlate VSA principles with PA.

 

I watch closely for patterns such as triangles..pennants...flags..trendlines..channels..etc.

 

I generally keep my chart clean of indicators except the ma's. Will mark it up with patterns as day unfolds so by end of session it may be all marked up but i start with candles and two MA's and vol at bottom.

 

Cool cool.

 

I used to pay a lot of attention to EMA's .... my two of choice were the 30 and 150 (influenced by Stan Weistein). I wouldn't even use an indicator like MACD if it weren't for Divergence purposes. Quite often with divergence/reversion trades, the pattern happens to be a Rising/Falling Wedge.

 

Like yourself, I try to stay as simple as I can ..... just the essentials. I don't have time to look at 10 different "lagging" indicators.

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My dumbass forgot to wait for the Michigan Sentiment and Consumer Confidence numbers early in the session and had to take a loss on my first entry ..... but I was patient for a new opportunity to form ....

 

Blue line is yesterday's volume POC (Point of Control)

Red line is today's volume POC

 

Once the early morning dip was bought up, I waited for the break above today's POC and to see if it would maintain support. The 5min candle on that break was very strong. The next couple of candles remained "inside" with support of today's POC. Sell volume waned, giving cue to the bulls to fill the gap up to yesterday's volume POC. I typically try to take advantage of the gap between two POC's (today's and yesterday's) whenever the opportunity presents itself.

 

firSP2W.png

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Today's VWAP reversion trade and some other observations.

 

Here's the general idea of what I was watching take place.

 

1. We initially were very bullish on the day.

2. After the initial upside trade I took early in the session, I was only looking to take a trade from the extremes. There was an opportunity to short the day's highs, but I decided to be prudent and just wait.

3. SPY consolidated betwen 162 and 162.48 for a few hours, but then sell volume started picking up at 1:45pm and broke VWAP (the light grey line). Sellers have now taken control.

4. At this point my thought process is to wait and watch the new intraday down trend to form a trend line and only enter on a break of that trend line if the volume confirms.

5. SPY bounces of 161.50(1) on increased buy volume (demand), it tests the trend line at 161.74 (2) and then pulls back, but notice it does not make a new low(3) and the sell volume was low (no supply).

6. Trend line is broken. Reversion to the next trendline (also VWAP) can now proceed. There is an upper wick at 161.92 from an earlier attempt to break the downtrend and it did offer some resistance. I could undestand someone scaling some of their profits out at that point.

 

It was important to note the reaction at VWAP. Buy volume did not continue to pour in and sell volume matched it. That VWAP/trendline area was a perfect place to take a short. First target scale out would be the previous bottom (161.50). Second target would be that lower trend line, which was broken earlier for the upside trade. Not ironically that trend line led all the way back down to Friday's volume POC. Notice how sell volume picked up dramatically to take the action there.

 

Those volume POC's act like magnets for the algos if you know which side has the control.

 

9TYnj28.png

Edited by Enigmatics

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Got some charts to post.

 

But first a thought.

 

You know, on a SPY 60min chart it pulled back on a negative divergence .... but on the dip it put in a higher low at 160.22 (previous was 159.86) and the MACD (5,13,1) put in a lower low. This is what is called "hidden divegence" and is considered a trend continuation pattern.

 

Be back shortly with the charts.

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1. Price makes a higher low at 160.22 (previous was 159.86)

2. MACD was making a lower low

3. That means "hidden divergence" aka trend continuation

4. Notice also when we tapped the 1 month POC, the sell volume had been declining. This was a textbook bear trap.

 

4soc8TV.png

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Do you give any weight to the fact that anticipation of a shortened session today could account for lower vol?

 

For a trade in today's session? No.

 

Although, I still try to remain pure in my volume analysis regardless of "time of year".

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My reversion trade for the day ......

 

I actually bought in on the original trend line break, along with the fact that supply had come to a halt (as you can see on the volume histogram). All the classic signs were there though for a reversion to VWAP. Stop volume candles. Positive Divergence. Low volume secondary testing of the low. Right at 1:20pm when 163.59 was hit, it put in a classic "no supply" candle.

 

I still didn't average down though. Trying not to get aggressive late in the day. If I'm profitable from earlier in the session, I typically cut down my position sizing to half of what I used as a mechanism for protecting profits. This trade though (reversions) is there almost every day. All it takes is for someone to be patient. Let the range play out and then understand what the volume is telling them.

 

xUKeaBb.png

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My reversion trade for the day ......

 

I actually bought in on the original trend line break, along with the fact that supply had come to a halt (as you can see on the volume histogram). All the classic signs were there though for a reversion to VWAP. Stop volume candles. Positive Divergence. Low volume secondary testing of the low. Right at 1:20pm when 163.59 was hit, it put in a classic "no supply" candle.

 

I still didn't average down though. Trying not to get aggressive late in the day. If I'm profitable from earlier in the session, I typically cut down my position sizing to half of what I used as a mechanism for protecting profits. This trade though (reversions) is there almost every day. All it takes is for someone to be patient. Let the range play out and then understand what the volume is telling them.

 

xUKeaBb.png

 

hey, nice chart......I do have a question.........while volume is clearly decreasing, the downward trend line is made out of two points......what would make you draw it like this and not earlier???....actual price trend line has more connecting points

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hey, nice chart......I do have a question.........while volume is clearly decreasing, the downward trend line is made out of two points......what would make you draw it like this and not earlier???....actual price trend line has more connecting points

 

Look at this chart again ..... "Conceptually" speaking, since we had a break and push below VWAP (after a brief period of consolidation w/lower highs), my first focus is to be patient as sellers have taken over the day's action. I begin looking for a series of points to connect as a trend line (drawn as 1-2-3 on the chart). I'm not quite sure of the "earlier" area to have drawn them as you have stated.

 

I forgot to mention that there was also a lot of chart confluence at today's bottom given that the early LOD of the session was 163.66 and the R1 (not featured here) was at 163.63.

 

wYLhzqF.png

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Well I have to ask...I notice you are using Stockcharts instead of a more standard charting software.....as I recall they get their feed from BATS....and if that's the case, the volume is bound to be way inaccurate....that means your left side volume readout is also inaccurate...

 

Your choice certainly but if I had money on the line, I would want accurate data...

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Well I have to ask...I notice you are using Stockcharts instead of a more standard charting software.....as I recall they get their feed from BATS....and if that's the case, the volume is bound to be way inaccurate....that means your left side volume readout is also inaccurate...

 

Your choice certainly but if I had money on the line, I would want accurate data...

 

I have my Tradesation that I pair up with it. Alas, Tradestation doesn't allow you to set up volume profile like I can on Stockcharts. They have a seperate window called "The Matrix" and it is only used intraday.

 

I wouldn't call "Stockcharts" as way inaccurate. What I have noticed is at times it's slower to adjust, particularly the volume Point of Control. Stockcharts ended up the day with POC right where my Tradestation's Matrix was and the plotted red line on my chart (nifty indicator I got from Blowfish on this site).

 

My Tradesation starting from the top has my MACD (5,13,1), then the candles, then the Better Volume indicator (displays volume based on bid/ask), followed by the standard volume histogram. The Matrix is on the left. It does not show "options" positions up there at the top of it. I used next week's 163 chain for the trade.

 

When I post the Stockcharts charts on here, it's typically because they're easier on the eyes IMO.

 

BUCsWTl.png

Edited by Enigmatics

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I have my Tradesation that I pair up with it. Alas, Tradestation doesn't allow you to set up volume profile like I can on Stockcharts. They have a seperate window called "The Matrix" and it is only used intraday.

 

I wouldn't call "Stockcharts" as way inaccurate. What I have noticed is at times it's slower to adjust, particularly the volume Point of Control. Stockcharts ended up the day with POC right where my Tradestation's Matrix was and the plotted red line on my chart (nifty indicator I got from Blowfish on this site).

 

My Tradesation starting from the top has my MACD (5,13,1), then the candles, then the Better Volume indicator (displays volume based on bid/ask), followed by the standard volume histogram. The Matrix is on the left. It does not show "options" positions up there at the top of it. I used next week's 163 chain for the trade.

 

BUCsWTl.png

 

As mentioned its the "dealers choice", I used to use TS but changed for similar reasons....

 

 

Good luck in the markets

Steve

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As mentioned its the "dealers choice", I used to use TS but changed for similar reasons....

 

Good luck in the markets

Steve

 

I switched to Tradestation in November. Everything I had come to know about it was so appealing and I just assumed since it was a highly respected brokerage that their Volume Profile would be what I needed. Was less than pleased after I found out it's not the greatest of platforms for VP. I can't go back and look at 1 week POC, 1 month POC, etc. etc. Blowfish's indicator does allow me to see today's and yesterday's. I have been lazy about checking out other alternatives (hence the using both Tradestation and Stockcharts right now).

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Look at this chart again ..... "Conceptually" speaking, since we had a break and push below VWAP (after a brief period of consolidation w/lower highs), my first focus is to be patient as sellers have taken over the day's action. I begin looking for a series of points to connect as a trend line (drawn as 1-2-3 on the chart). I'm not quite sure of the "earlier" area to have drawn them as you have stated.

 

I forgot to mention that there was also a lot of chart confluence at today's bottom given that the early LOD of the session was 163.66 and the R1 (not featured here) was at 163.63.

 

wYLhzqF.png

 

ok, fair enough, thanks

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It would appear I've been neglecting my own thread. :o

 

Been more preoccupied with my Stocktwits account I guess. Plus keeping up with my old blog.

 

At any rate a quick glance at the 2hour chart of CLDX. A little lazy right now and didn't mock up the daily chart too, but the stock is currently trading at a near 50% discount to February's highs. Look for a reversion back up into the demand test around the 20.00 level if the trend line is breached.

 

EDIT: Actually there is some slight resistance at 17.45 as well.

 

CYIMV4k.png

Edited by Enigmatics

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