Does Divergence Signals Really Work?

[r4bb1t 10]

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.

[PhilBeachBoy 10]

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.

[Tams 20]

>Does Divergence Signals really work?

 

can you define "work"?

[Head2k 10]

The only way to find out if something works is to test it yourself, not starting polls about it.

[bigsnack 10]

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.

[peterjerome 10]

divergence is another tool...not a holy grail...knowing how & when to use it can be effective.

peter.

[choicecap1 10]

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:

[flynhigher 10]

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.

[kanch 10]

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.

[bigsnack 10]

Right, but how many times will RSI or macd show divergence and then the original trend continues?

[brownsfan019 17]

My 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.

[bigsnack 10]

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

[izzahmu 10]

they work if timed right with the mkt. and if the stock is already tired (gone too far)...Bottom line is you need other factors to pull the trigger!!!!!

[hgalek 10]

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

 

  Quote

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.

[Do Or Die 10]

  izzahmu said:

they work if timed right with the mkt. and if the stock is already tired (gone too far)...Bottom line is you need other factors to pull the trigger!!!!!

 

Divergences using RSI

[phantom 16]

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

[phantom 16]

(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

[Tams 20]

for every divergence that works,

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

the score is probably 50-50 at best

[Do Or Die 10]

  Tams said:

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.

 

[phantom 16]

RE: Mostly subjective. They work if someone reads them in correct context.

 

Now THAT'S what I'm talking about!!!

 

 

Phantom

[zdo 20]

: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 …

[Do Or Die 10]

  zdo said:

: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.

[phantom 16]

  Do Or Die said:

 

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

[Do Or Die 10]

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.

[phantom 16]

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