Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

r4bb1t

Does Divergence Signals Really Work?

Does Divergence Signals really work?  

163 members have voted

  1. 1. Does Divergence Signals really work?

    • Yes.
      119
    • No.
      44


Recommended Posts

when you start learning of technical analysis.

you had to hear 'Divergence Signal' hundred of times that says those are powerful reversal signal.

you know what?

all the oscillators that has Divergence signals are calculated by exponential moving average. such as famous MACD, RSI.

but what if replacing EMA to SMA from the equation?

divergence signals are gone.

this implies that divergence signals are not from the oscillator calculation. exponential moving average generates them.

it is just that the power of movement doesn't increasing or decreasing 'exponentially'

do you believe that a Trend must have exponential movement?

in my opinion divergence signal is most overestimate technique. and it makes critical trading failure.

Share this post


Link to post
Share on other sites

You don't seem to know at all what you are talking about. Divergence is not always computed in only the way you seem to suggest. Divergence behavior of bounded oscillator-type indicators does appear on many different indicators. Is it useful? It can be very powerful. Does it fail? Of course it does. But perfection is not something attainable anyway in any indicator. It is a matter of proportion of its successes. How you decide to classify the occurrence of divergence requires many decisions..how long is the lookback period, are equal indicator extremes gong to be included, how many bars apart are accceptable, what about situations where a third less extreme point follows the two..this usually implies that the first divergence trade will be somewhat underwater, but this next extreme will often work. The less lag, the greatest smoothness and the retention of sharpness at the turn in the indicator assists in the divergence signal being timely and usefull. Classifying divergence in real-time manually by the trader is difficult in the heat of battle. The computer algorithms hae improved over the years to perform this classification. This presents an objective rule-base way to do this but it still requires all the preceeding decisions to be made and coded or entered as inputs by the user. Important tops and bottoms often are accompanied by clear divergence; it is a matter of filtering out the erroneous signals by some means...which is pretty much the problem we face with every trading approach.

Share this post


Link to post
Share on other sites

I personally found that I erased a lot of my trading mistakes when I stopped using divergence to assist with trading decisions. Like with most things that are trading related, the context of when the divergence occurs is key, and I didn't get that when I was exploring using divergence as an entry trigger. I'm sure it works great for the people that have done the research and fit it into their trading plan, but I'm definitely not there with it.

Share this post


Link to post
Share on other sites

Divergence is nothing more that price rejection faster at certain level,so if you can identify other indications of where to expect price to have this type of action(sop/resist) then you dont even need the indicator to find it.

All you need to do is watch what happen there and price action would tell you if a divergence pattern is likely to ocurr before the indicator shows it.

i wich i was smarter to post some chart but I'm not.

:crap:

Share this post


Link to post
Share on other sites

For my analysis I use Divergences. I use a hierarchy system when evaluating a stock. However, divergences are certainly not a buy dont buy issue. They simply help me stack the odds more in my favor.

 

I also wonder which divergences people like and which divergences people dont like.

Share this post


Link to post
Share on other sites

I think it does. One has just to study specific examples to prove this. I have studied both macd and rsi indicators and i have found out that divergence really exists. In an up trend, higher highs are made, and so with the macd and rsi levels. However, when the trend is about to reverse, on the next high (which would be the last), the macd or rsi will not show higher high. The next macd or rsi high will be lower than the previous. This is what is called divergence. It is now time to reverse trend.

Share this post


Link to post
Share on other sites

My :2c: is that divergences can work. Far from the holy grail so you either have to trade the all and have good risk mgmt in place or filter the losing ones out. Some considerations in trading divergences is that they will show in trending moves, how quickly do you want to get in or do you wait for confirmation... among many other things. Adding divergences to your trading plan can be addition but I think you'll need more than just divergences.

Share this post


Link to post
Share on other sites

Right, exactly. At the risk of sounding like a broken record, if you have an understanding of longer term support and resistance, and you wait for those levels to trade, I would say that divergence can help give confidence in getting in. Going long on the first RSI divergence after only wave 1 of a selloff after longer term support has failed is probably not the best of ideas :)

Share this post


Link to post
Share on other sites

For your consideration: http://thepatternsite.com/DivergenceTest.html

 

First, tests show that divergence between price and the Wilder relative strength index (RSI) beat the performance of the S&P 500 index consistently only in a bull market using bullish divergence. The other combinations of bull/bear markets and bullish/bearish divergence underperform the market index.

 

For the winning combination, bullish divergence in a bull market, I found that it wins between 45% and 48% of the time. In other words, the performance of the index beats stocks showing bullish divergence more often than not.

 

Second, I read that when the indicator makes a shallow dip or rise between the end points in divergence, it means a more powerful move. That turns out to be true but only in a bear market.

 

Third, it's best to ignore divergence when the first peak or valley occurs between 30 and 70. Including that range hurts performance in nearly all categories.

Share this post


Link to post
Share on other sites

Divergences work like a champ when they are used on counter trend tests (ie counter trend double bottoms) while trying to enter on a resumption of the trend.

 

They are not so effective when trying to pick market bottoms or tops.

 

 

Luv,

Phantom

Share this post


Link to post
Share on other sites

(MACD) divergence really shines during counter trend tests such as a-b-c consolidations. You'll see the divergence between the a and c legs and the corresponding macd peaks/valleys very clearly in most cases.

 

 

Luv,

Phantom

Share this post


Link to post
Share on other sites
for every divergence that works,

I can find you at least a divergence that does not.

the score is probably 50-50 at best

 

Hi Tams,

 

It's pretty much like saying do chart patterns work. Mostly subjective. They work if someone reads them in correct context.

 

:2c:

Share this post


Link to post
Share on other sites

:confused::confused:

‘mathematically’, seems many divergences are, in large part, created/made possible by the form, extent and duration of the most recent correction before the current thrust which is exhibiting indicator divergence …

Share this post


Link to post
Share on other sites
:confused::confused:

‘mathematically’, seems many divergences are, in large part, created/made possible by the form, extent and duration of the most recent correction before the current thrust which is exhibiting indicator divergence …

 

Divergences using RSI

 

They can be quantified to a good extent (the analysis can be automated). but the problem is that coding them requires more than just familiarity with ninja/tradestation. I personally know people who have automated their discretionary trading systems and their code runs into thousand of lines.

Share this post


Link to post
Share on other sites

 

I personally know people who have automated their discretionary trading systems and their code runs into the thousands of lines.

 

Do you have any idea what sort of trading these people are doing, ie ultra short term v. position trading?

 

 

Phantom

Share this post


Link to post
Share on other sites

Hi Phantom,

 

I was referring to discretionary short-term trading (holding time 30 mins to 3 days).

 

Since last year I have been working on automating my strategies. I'm a Amibroker user- and believe it or not- it took me almost 6 months to get a 'satisfactory' support/resistance code. I'm talking about basic S/R which any discretionary trader will be able to mark. When we mark these levels we are quick to adjust for gaps, spikes, stagnated prices. I'm talking about stuff which may appear common sense to a discretionary trader; but when coding everything need to be quantified. It's a little over 100 lines.

 

Take the divergences for example for which I gave a link in previous post. There is a method for ranking these based on the conditions which make them occur, and related to how accurate they may be. If you go through that post I factor several things like previous trend and price shocks for ranking them. The ranking method alone will receive quotes around 1000$ from programmers.

Share this post


Link to post
Share on other sites

I have a theory why the MACD will show divergence during corrective moves in a trend.

 

Using the a-b-c correction as an example, I submit that as the market approaches the "c" point of the correction, which is usually a test of some degree of the "a" point in the correction, the market reacts with a rejection of price that usually does not occur during the formation of the "a" point.

 

One can oftentimes see indication of price rejection (dependent upon the time frame one is looking at, of course) in the form of hammer bars while no such indication of price rejection exists around the "a" point.

 

Since these price rejection bars have closing prices located near the extremes of their bars, the moving average of these bars will start to move in the direction of the trend earlier than the moving average of the bars that formed the "a" test point.

 

This, of course, creates the divergence between the test points and the moving averages.

 

Do or Die, in your days as a floor trader were you able to witness this phenomenon of price rejection during the consolidation phase of a trend move?

 

 

Phantom

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Topics

  • Posts

    • Actions for the 22nd.  I seem to be on a bad run, I'm really struggling with the opening minutes of the trades I'm taking and then get sucked into a little over trading.
    •   Date : 23rd January 2019.

      MACRO EVENTS & NEWS OF 23rd January 2019.



      FX News Today 10-year Treasury yields are down from overnight highs, but still up 0.7 bp at 2.746%, and 10-year JGB yields climbed 0.8 bp to -0.004%. Stock markets remained cautious during the Asian session. The Bank of Japan held policy steady, as expected, while further reducing its outlook for inflation. The resulting weakness in the Yen didn’t help stock markets and Topix and Nikkei dropped -0.60% and -0.14% respectively. The Hang Seng is also down -0.04%, despite mainland China markets initially moving higher as China’s central bank pumped liquidity into the banking system once again. Still, the measures are also a sign that officials are nervous about the slowdown in the economy and CSI 300 and Shanghai Comp are down -0.24% and -0.13%. The bank offered around 258 bln Yuan (USD 38 bln) to banks through its medium term lending tool. Markets continue to question the progress in the US-Sino trade talks, even though White House adviser Lawrence Kudlow said that the trade talks are still on and the story about cancelled preparatory meetings was “not true, there was never any meeting. We are moving toward negotiations.” The negotiations next week will be “very, very important” and “determinative”. Meanwhile, there are the first signs of a possible way out of the US government shutdown. Markets remain easily spooked, but appear to have already priced in a lot of risk last year and US stock futures are moving higher after yesterday’s sell off. Oil prices are trading at USD 53.27 per barrel. Charts of the Day

      Main Macro Events Today Canadian Retail Sales – After Wholesale Sales plummeted yesterday, Canadian Retail Sales are expected to have also declined by 0.4% m/m, with core Retail Sales (ex autos) expected to have declined by 0.6%. World Economic Forum at Davos –The second day of the WEF annual meetings held in Davos and attended by officials from over 90 countries. Comments from central bankers and other influential officials can create significant market volatility. Richmond Manufacturing Index – Expectations – The index is expected to have remained at a sub-zero level, standing at -2 after the -8 in the December release. Support and Resistance Levels
       

      Always trade with strict risk management. Your capital is the single most important aspect of your trading business.

      Please note that times displayed based on local time zone and are from time of writing this report.

      Click HERE to access the full HotForex Economic calendar.

      Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE!

      Click HERE to READ more Market news.

      Dr Nektarios Michail
      Market Analyst
      HotForex

      Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • USDJPY Eyes The 109.88 Resistance Zone And Beyond USDJPY eyes the 109.88 resistance zone beyond as it looks to resume its upside pressure. On the upside, resistance comes in at 110.00 level. A turn above here will turn attention to the 110.50 level. Further out, we expect a possible move towards the 111.00 level if the earlier resistance is invalidated out. The next resistance resides at the 111.50. Its daily RSI is bullish and pointing higher suggesting further strength. On the downside, support comes in at the 109.50 level where a break will target the 109.00 level. Below that level will turn focus to the 108.50 level and then lower the 108.00 level. On the whole, USDJPY faces further upside pressure on corrective recovery.  
    • $AVGR (AVGR) Avinger stock strong day w/ bottom breakout watch above 0.38,


      analysis https://stockconsultant.com/?AVGR
    • AUDUSD Weakens On Further Pullback Threats.  AUDUSD weakens on further pullback threats as it saw price extension during early trading on Tuesday. On the upside, resistance stands at the 1.7200 level. A cut through here will turn attention to the 0.7250 level and then the 0.7300 level. A violation will set the stage for a retarget of the 0.7350 level. Support resides at the 0.7100 level where a breach will aim at the 0.7050 level. Below here will set the stage for a run at the 0.7000 level with a cut through here targeting further downside pressure towards the 0.6950 level. On the whole, AUDUSD faces further downside threats.
×

Important Information

By using this site, you agree to our Terms of Use.