Divergence Trading Works

[T1P1]

Quote from the1:

You do see the one toward the EOD that didn't work, right? Divergences are like every other indicator...sometimes they work, sometimes they don't. It's the trader interpreting the signals that will determine profit or loss.

This divergence WAS at the end of the day - less than 30 minutes before the close. Were you, perhaps, looking at divergence in a price based indicator on a time based chart? Using volume based charts and indicators or order flow rather than price lessens the falst signals and makes the work less subjective.

The times on the chart are PST.

 

[traderslair]

divergence trading Is a losing startegy, it only works for a few times, then market change and it stops working

 

[wrbtrader]

Quote from traderslair:

divergence trading Is a losing startegy, it only works for a few times, then market change and it stops working

You talking about the specific method discussed in this thread or you talking about the methods you've used that didn't work for you that has nothing to do with the method discussed in this thread ?

If the latter, what type of divergence strategies you couldn't get to work for you.

 

[T1P1]

Very astute comment wrbtrader, thanks.

Most barely understand divergences let alone the difference between divergences between price and price based indicators as compared to divergences between price and order flow based indicators.

Taken in the longer term, divergences between price and the balance of trade can often foretell major moves.

As indicated in the chart below, in late Feburary both price and the balance of trade made new highs. At the first of May price made a new high and Net New Trade made a much lower high (negative Divergence).

Over the next couple of months while price clung to the highs the balance of trade showed a steady decline, undermining price. In late July the market broke for more than 200 points in the S&P.

Movements in price are the effect - order flow/balance of trade is the cause.

 

[wrbtrader]

Quote from T1P1:

Very astute comment wrbtrader, thanks...

One thing I've learned from my Japanese Candlestick discussions with those that said it doesn't work here at ET is that they were either using it without market context, incorrect identification of candlestick patterns, lacking understanding of specific candlestick patterns or using it without a trading plan.

Thus, I assume such happens with other types of trading approaches. There are those that saids it doesn't work and those that saids it does work. I'm always interested in how the two different groups had been applying the strategy differently.

Simply, those that say it doesn't work...I want to know what they were doing and then not do the same as them. Thus, I don't want to be part of the majority that couldn't figure it out. Instead, I want to be part of the minority (the few) that did figure it out. That's why I want to go beyond "blanket statements" to allow discussions to get into specific details with chart examples by those that couldn't find a way to make it work while others did find a way.

 

[bmwhendrix]

Today, To many trades, got a little sloppy.

 

[GoldStandard]

Thanks for posting charts. Its always interesting to see the different ways people approach trading.

Do you know exactly what information the Net New Trade indicator is giving? Is it similar to a volume delta calculation? The name Net New Trade seems to imply it is somehow able to measure which orders represent new trades as opposed orders closing existing trades or hedging. What is your understanding of what this indicator shows exactly? Or are you using it as a black or grey box?

Quote from T1P1:

Very astute comment wrbtrader, thanks.

Most barely understand divergences let alone the difference between divergences between price and price based indicators as compared to divergences between price and order flow based indicators.

Taken in the longer term, divergences between price and the balance of trade can often foretell major moves.

As indicated in the chart below, in late Feburary both price and the balance of trade made new highs. At the first of May price made a new high and Net New Trade made a much lower high (negative Divergence).

Over the next couple of months while price clung to the highs the balance of trade showed a steady decline, undermining price. In late July the market broke for more than 200 points in the S&P.

Movements in price are the effect - order flow/balance of trade is the cause.

 

[T1P1]

Quote from GoldStandard:Thanks for posting charts. Its always interesting to see the different ways people approach trading. Do you know exactly what information the Net New Trade indicator is giving? Is it similar to a volume delta calculation? The name Net New Trade seems to imply it is somehow able to measure which orders represent new trades as opposed orders closing existing trades or hedging. What is your understanding of what this indicator shows exactly? Or are you using it as a black or grey box?

The raw input to this indicator is a running net of buying and selling volumes.

"Free trading liquid markets trade in a Price/Time/Volume Continuum that conforms to certain basic dynamics, three of which are defined here:"

"As Price changes or not and Time passes Volume happens/accumulates.

As Time passes and Trade/Volume happens Prices change in Direct Proportion to the degree to which that Trade is Imbalanced.

As Time passes and Trade/Volume happens Prices change in Inverse Proportion to the degree to which that Trade is Balanced."

We use The Net New Trade and the V94 Window indicator to find the divergences that mark extremes and the patterns of continuation that mark the rest of the leg.

As NNT is cumulative and V94 is a moving window - V94 is the more sensitive indicator.

That said, in the chart below you can see that with a lower low in price and a higher low in BOTH V94 and NNT there was a definite positive divergence between price and order flow and as a result of this positive divergence - price broke to the upside.

 

[wrbtrader]

Quote from bmwhendrix:

Today, To many trades, got a little sloppy.

How many of your 20 trades were via divergence and what was the results of the winners versus the losers assuming some of the trades were not divergence. ???

 

[GoldStandard]

Quote from T1P1:

"Free trading liquid markets trade in a Price/Time/Volume Continuum that conforms to certain basic dynamics, three of which are defined here:"

"As Price changes or not and Time passes Volume happens/accumulates.

As Time passes and Trade/Volume happens Prices change in Direct Proportion to the degree to which that Trade is Imbalanced.

As Time passes and Trade/Volume happens Prices change in Inverse Proportion to the degree to which that Trade is Balanced."

What does this mean exactly? Is the indicator modifying the running bid/ask total based on how much and how quickly price reacts to bid/ask imbalances?