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Do Or Die

Divergence Strategy- Discussion

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Hi,

 

This thread will serve the purpose of discussion for live signals posted in Divergence Trading Strategy- Advanced.

 

I have mentioned all of this before... but I understand the main thread is messed up so here is the recap.

Internal Relative Strength is defined as the price of a stock compared to it's prices n days back. For example if the stock is trading above it's range over last 10 days, it is relatively stronger than a stock which is trading in the middle of it's past 10 days range. It is measured by RSI, Stochastics, Aroon, ADX etc. This strategy uses RSI(10).

 

Negative Divergence: Is defined as the decrease in internal relative strength of a stock, while the price apparently increases.

Positive Divergence: Is defines as the increase in internal relative strength of a stock, while the price apparently decreases.

Support/Resistance: Any of the popular anchor points like recent pivot high(low), open price of day, high(low) of day, confluence of pivots levels on shorter time frame.

 

Example Charts:

http://www.traderslaboratory.com/forums/technical-analysis/11438-divergence-trading-strategy-advanced-10.html#post133963

http://www.traderslaboratory.com/forums/technical-analysis/11438-divergence-trading-strategy-advanced-10.html#post133966

http://www.traderslaboratory.com/forums/technical-analysis/11438-divergence-trading-strategy-advanced.html

 

Important: Please make sure you are familiar with Concepts in Technical Analysis before reading further.

 

Strategy rules: All trades are taken on daily, for convenient discussion. I will automate posting of intraday trade signals via twitter API when the strategy itself is 100% automated.

Signal: A signal is generated when a positive/negative divergence is seen.

Prevalent Trend: Is determined by the same oscillator used for generating divergence signals. See here on determining trend using RSI.

Entry: Once a signal is generated, look for an entry for next 10 bars or so, until the price movement confirms the direction of signal. Trades are executed when the stock touches/breaks the nearest supp/ress.

Exit/Stop: Depends upon stock's volatility and how stronger the prevalent trend is. For example stops will be tighter in range-bound market vs. when the trend greatly favors your position

Strength: Enter fast and Exit fast, once in a position, hold as long your minimum risk/reward is maintained AND the prevalent trend favors your position. For example, I exited many positions within couple of days because stop was hit; holding SLB since 7/12 (currently ninth day) because its trend favors my position.

Costliest Mistake: Do not buy after big gap up, and do not short after big gap down. Similarly in intraday do not buy (short) after a spike up (down).

 

See attached charts for current running trade on FLS.

 

Many members were confused by what the strategy actually does, because the original thread was flooded by opinions from other 'professional' with apparently 'superior' trading strategies. The fact that these members never posted live trades/signals is left upon the readers to decide about their credibility.

daily.thumb.png.473094c4646e5a08269dd2b6c110bd1a.png

hourly.thumb.png.f350a00c2910c0260d27950274f7ec26.png

5aa710bc64398_dailycondensed.thumb.png.9080beb06b9bdadf0147b718ab816ff5.png

Edited by Do Or Die

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A question for you DoD. Given that your divergence signals are effectively putting you on alert as to the timing of potential trades, what are you using for the price of entry, or isn't that an especially important factor? If you use a variety of different methods, surely you must see more common entry types given certain divergence types right? Also, it seems you are using multiple instruments presumably in an attempt to smooth out results, but are you attempting do diversify in any way by using non-correlated products? Finally, how realistic or not do you think this strategy is for most of our forum members(honest question)? I have to say that I am not a believer in RSI although there are certain divergence types which I do look at, but only in support of my main techniques.

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  Do Or Die said:
Many members were confused by what the strategy actually does, because the original thread was flooded by opinions from other 'professional' with apparently 'superior' trading strategies. The fact that these members never posted live trades/signals is left upon the readers to decide about their credibility.

 

I would just point out that this isn't an entirely fair statement DoD. Just because a member either doesn't want to post live entries, or has a method which dictates that they can't really do so otherwise it would distract them, doesn't mean they aren't being honest about what they're doing.

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Divergence is a powerful strategy when used in correct context. I've used divergence successfully for years to exit position trades. I prefer 'intrinsic' strength (IS) over 'relative' strength. stock could move up strongly showing relative strength and still have no intrinsic strength. i.e. market could be sole source of this 'relative' strength. Intrinsic Strength is EFS file comparing price to S&P 500. when IS trends up, stock shows internal strength coming from factors outside of market influence. this is a key nuance.

 

reference attached chart:

initially look for IS to make lower high( LH). when this occurs, look for momentum (CCI) to make lower high while price makes higher high.(basic divergence). NOTE: it's important that momentum come from above overbought level. (+200)

 

locate point where momentum makes lowest low (LL) between momentum highs. this LL should be below +100 level. when momentum drops below this LL point, exit is warranted. usually occurs when momentum drops below the zero line (ZL), identified with RED dot.

 

Interestingly, HACO (Heikin-Ashi Candlestick Oscillator) signals exit on same day. HACO is the green / yellow overlay on price. for info on HACO, click here.

Heikin-Ashi Candlestick Oscillator | ThinkScripter

 

good trading,

Peter.

5aa710bd0c2a8_Macy-DivergenceExit.thumb.png.b341b06bae22d12655c6484c6f02087a.png

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  TheNegotiator said:
A question for you DoD. Given that your divergence signals are effectively putting you on alert as to the timing of potential trades, what are you using for the price of entry, or isn't that an especially important factor?

Using S/R levels for execution, as mentioned

  Quote

If you use a variety of different methods, surely you must see more common entry types given certain divergence types right?

I do not believe in divergence types hidden/reverse etc. If you see my definition, a divergence is a divergence, as simple as that.

  Quote

Also, it seems you are using multiple instruments presumably in an attempt to smooth out results, but are you attempting do diversify in any way by using non-correlated products?

LOL, no diversification sought at this stage. If I post just one signal at a time I run the risk of being called too selective and hiding something.

  Quote

Finally, how realistic or not do you think this strategy is for most of our forum members(honest question)? I have to say that I am not a believer in RSI although there are certain divergence types which I do look at, but only in support of my main techniques.

This is a discussion forum; everyone is free to pick what they like, ditch what they feel useless, and if possible try improve the original strat in a definite manner. (Improvement does not means ditching the original premise)

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  peterjerome said:
.. I prefer 'intrinsic' strength (IS) over 'relative' strength.

 

Thanks for the comment... it seems that you are calling IS what I call 'internal relative strength'... how exactly do you measure it?

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  Do Or Die said:
Thanks for the comment... it seems that you are calling IS what I call 'internal relative strength'... how exactly do you measure it?

 

DoD,

IS is calculated by dividing the close by S&P500. an increasing IS indicates some factor outside of market influence..e.g. company internals, industry, above avg buying...

if you understand easy code...this should help.

good trading,

Peter.

 

 

var aFPArray = new Array();

 

function preMain() {

setPriceStudy(true);

setStudyTitle("R.S. vs S&P 500");

setCursorLabelName("SPX");

setDefaultBarFgColor(Color.black);

 

aFPArray[0] = new FunctionParameter( "Divisor", FunctionParameter.NUMBER);

with( aFPArray[0] ) {

setLowerLimit( 100 );

setUpperLimit( 2000 );

setDefault( 1000 );

}

}

 

function main(Divisor) {

if (Divisor == null) Divisor = 1000;

var vClose = getValue("Close", 0, 1);

var vSPX = getValue("Close", 0, 1, "$SPX");

if(vSPX > 0) {

return (vClose / vSPX * Divisor);

} else {

return;

}

}

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Hi,

The RSI is my favorite indicator and is the basis of my trading

It is usually based on the closing price so its trace is the same as that of a line chart, other when it shows either regular or hidden divergence

The trace is contained within the limits of 0-100

 

Basics

Cardwell found some interesting facts regarding particular RSI levels:

An uptrend is contained within the 40-80 RSI levels

A downtrend is contained within the 20-60 RSI levels

A sideways market is contained within the 40-60 RSI levels

The RSI is most sensitive in the 40-60 range

Check it out - IT WORKS (I use RSI (9))

 

Uptrends can start from basically 2 conditions:

From a breakout from congestion (40-60 levels)

or from a downtrend or major correction, from a level below 40, when it breaks above 40 and confirmed when it passes up through the 60 level

 

The opposite for a downtrend

congestion (40-60) break below 40

downtrend - breaks below 60 and confirmed when it breaks below 40

 

Summarize:

Uptrend - 40,60

When it is trending the trace operates above 60,

when it is in the 40-60 range, it is going sideways (not in a downtrend), it could go either above 60 or below 40 (start trending), so the trend is neutral

When the trace operates below 40 it is trending down

when it retraces to operate between 40 and 60 - again the trace could break either below 40 or above 60 (i.e. begin trending), so it is neutral

 

Trending

An uptrend is still in place so long as the trend stays above the 60 level

A stable uptrend tends to operate in the 60-70 levels

i.e. trend reversals often occur at the 70 level, but a good trend will test the 60-70 levels multiple times

If the trace operates above the 70 level, then its momentum is becoming unsustainable, particularly as it approaches the 80 level - it may be a good policy to trail a stop below each candle above the 70 level

Again a really strong trend can stay above the 70 level and retrace to rebound several times before it finally reverses - that's trading

But the majority of the time, the first retrace is signals the end of the trend

Downtrend

Opposite

 

Uses

1 New trends - breakouts and reversals - as above

2 Using various RSI levels as Support / Resistance for S/R trading

3 Using the RSI trace for trendline and pattern trading

4 Using RSI for divergence trading

 

As we have covered new trends already lets look at the others

RSI levels used as Support/Resistance

Drawing S/R lines on pure price action can be a bit subjective at times, as what may appear as important levels to one person may not be significant to others...........

Also trendlines must be drawn for each instrument we trade, and they may require updating at times........

 

Using RSI S/R levels will overcome this "problem"

Our RSI levels are 20, 30, 40, 50, 60, 70 and 80

These lines are used on ALL charts, thet never change

To reduce this number and help unclutter out charts, the 20 and 80 levels can be removed.

Remember once price goes above 70 or below 30 , we trail a stop below each candle

So we are left with just the 30, 40, 50, 60 and 70 levels

Try it, it works great - and we get early signals at least as good as pure price action

 

3 RSI trace for trendline / pattern trading

The RSI race which is basically a series of pivot hi's and lo's is ideal foe drwing trendlines and chart patterns - they often give early signals

Chart patterns in the RSI 40-60 range (congestion) are well worth looking for

Trendlines - the current trendline is the last pivot low that can be connected to the furthest away pivot lo withour passing thro the RSI trace etc etc

 

4 Divergence trading

Once we have our initial 2 pivot lo's or hi's to define our divergence with price - continue this line into the future to act as our trading trendline

Then use our trendline trading management to manage the trade, if price should

accelerate and trace a higher pivot lo (in an uptrend), then use this pivot low with the previous pivot low as your new trendline etc etc

The last two pivot lo's hi's is the current trend direction - use with discretion

 

The RSI works very well with cadlesticks and Bollinger Bands

 

Conclusion

The RSI indicator is very versitile and defies the often quoted GUROs??? who say indicators do not work or that they lag price

When used properly it can give a very good indication of the price action to come

 

I hope the above ramblings, they are probably a bit disjointed, make sense and be of help to some traders

 

Time for dinner, no time to back check

 

Merry Christmas from Australia

Peter

 

PS I hope there are no errors

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  peterjerome said:
DoD,

IS is calculated by dividing the close by S&P500. an increasing IS indicates some factor outside of market influence..e.g. company internals, industry, above avg buying...

if you understand easy code...this should help.

good trading,

Peter.

This is very important for my trading too... see here, I made two live calls in APPL based only on the change in relative strength (or IS).

 

I have a feeling our trading has lots of elements in common... will look forward to interact more with you.

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  rseye said:
Hi,

The RSI is my favorite indicator and is the basis of my trading

It is usually based on the closing price so its trace is the same as that of a line chart, other when it shows either regular or hidden divergence

The trace is contained within the limits of 0-100

 

Fantastic Rseye! It is comprehensive as well as concise.

 

I have programmed some of these rules, you may like to check backtest results at Regime Adjusted RSI System

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DoD,

 

I think you deserve kudos for posting your system and the structured way you present it - very nice indeed.

 

I might not be too certain that it will stand the test of time, but like I said your approach is brilliant so keep the spirit - you truly are a nice addition to the forum!

 

To the other members, try not to post your suggestions on which way you think it should be done now that DoD has moved to a new thread in an effort to keep it cleaner. :crap:

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:):Resourceful thinking - thanks & Merry Xmas to all.

Kiwinz, New Zealand

 

  rseye said:
Hi,

The RSI is my favorite indicator and is the basis of my trading

It is usually based on the closing price so its trace is the same as that of a line chart, other when it shows either regular or hidden divergence

The trace is contained within the limits of 0-100

 

Basics

Cardwell found some interesting facts regarding particular RSI levels:

An uptrend is contained within the 40-80 RSI levels

A downtrend is contained within the 20-60 RSI levels

A sideways market is contained within the 40-60 RSI levels

The RSI is most sensitive in the 40-60 range

Check it out - IT WORKS (I use RSI (9))

 

Uptrends can start from basically 2 conditions:

From a breakout from congestion (40-60 levels)

or from a downtrend or major correction, from a level below 40, when it breaks above 40 and confirmed when it passes up through the 60 level

 

The opposite for a downtrend

congestion (40-60) break below 40

downtrend - breaks below 60 and confirmed when it breaks below 40

 

Summarize:

Uptrend - 40,60

When it is trending the trace operates above 60,

when it is in the 40-60 range, it is going sideways (not in a downtrend), it could go either above 60 or below 40 (start trending), so the trend is neutral

When the trace operates below 40 it is trending down

when it retraces to operate between 40 and 60 - again the trace could break either below 40 or above 60 (i.e. begin trending), so it is neutral

 

Trending

An uptrend is still in place so long as the trend stays above the 60 level

A stable uptrend tends to operate in the 60-70 levels

i.e. trend reversals often occur at the 70 level, but a good trend will test the 60-70 levels multiple times

If the trace operates above the 70 level, then its momentum is becoming unsustainable, particularly as it approaches the 80 level - it may be a good policy to trail a stop below each candle above the 70 level

Again a really strong trend can stay above the 70 level and retrace to rebound several times before it finally reverses - that's trading

But the majority of the time, the first retrace is signals the end of the trend

Downtrend

Opposite

 

Uses

1 New trends - breakouts and reversals - as above

2 Using various RSI levels as Support / Resistance for S/R trading

3 Using the RSI trace for trendline and pattern trading

4 Using RSI for divergence trading

 

As we have covered new trends already lets look at the others

RSI levels used as Support/Resistance

Drawing S/R lines on pure price action can be a bit subjective at times, as what may appear as important levels to one person may not be significant to others...........

Also trendlines must be drawn for each instrument we trade, and they may require updating at times........

 

Using RSI S/R levels will overcome this "problem"

Our RSI levels are 20, 30, 40, 50, 60, 70 and 80

These lines are used on ALL charts, thet never change

To reduce this number and help unclutter out charts, the 20 and 80 levels can be removed.

Remember once price goes above 70 or below 30 , we trail a stop below each candle

So we are left with just the 30, 40, 50, 60 and 70 levels

Try it, it works great - and we get early signals at least as good as pure price action

 

3 RSI trace for trendline / pattern trading

The RSI race which is basically a series of pivot hi's and lo's is ideal foe drwing trendlines and chart patterns - they often give early signals

Chart patterns in the RSI 40-60 range (congestion) are well worth looking for

Trendlines - the current trendline is the last pivot low that can be connected to the furthest away pivot lo withour passing thro the RSI trace etc etc

 

4 Divergence trading

Once we have our initial 2 pivot lo's or hi's to define our divergence with price - continue this line into the future to act as our trading trendline

Then use our trendline trading management to manage the trade, if price should

accelerate and trace a higher pivot lo (in an uptrend), then use this pivot low with the previous pivot low as your new trendline etc etc

The last two pivot lo's hi's is the current trend direction - use with discretion

 

The RSI works very well with cadlesticks and Bollinger Bands

 

Conclusion

The RSI indicator is very versitile and defies the often quoted GUROs??? who say indicators do not work or that they lag price

When used properly it can give a very good indication of the price action to come

 

I hope the above ramblings, they are probably a bit disjointed, make sense and be of help to some traders

 

Time for dinner, no time to back check

 

Merry Christmas from Australia

Peter

 

PS I hope there are no errors

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  Do Or Die said:
Hi,

 

This thread will serve the purpose of discussion for live signals posted in Divergence Trading Strategy- Advanced.

 

I have mentioned all of this before... but I understand the main thread is messed up so here is the recap.

Internal Relative Strength is defined as the price of a stock compared to it's prices n days back. For example if the stock is trading above it's range over last 10 days, it is relatively stronger than a stock which is trading in the middle of it's past 10 days range. It is measured by RSI, Stochastics, Aroon, ADX etc. This strategy uses RSI(10).

 

Negative Divergence: Is defined as the decrease in internal relative strength of a stock, while the price apparently increases.

Positive Divergence: Is defines as the increase in internal relative strength of a stock, while the price apparently decreases.

Support/Resistance: Any of the popular anchor points like recent pivot high(low), open price of day, high(low) of day, confluence of pivots levels on shorter time frame.

 

Example Charts:

http://www.traderslaboratory.com/forums/technical-analysis/11438-divergence-trading-strategy-advanced-10.html#post133963

http://www.traderslaboratory.com/forums/technical-analysis/11438-divergence-trading-strategy-advanced-10.html#post133966

http://www.traderslaboratory.com/forums/technical-analysis/11438-divergence-trading-strategy-advanced.html

 

Important: Please make sure you are familiar with Concepts in Technical Analysis before reading further.

 

Strategy rules: All trades are taken on daily, for convenient discussion. I will automate posting of intraday trade signals via twitter API when the strategy itself is 100% automated.

Signal: A signal is generated when a positive/negative divergence is seen.

Prevalent Trend: Is determined by the same oscillator used for generating divergence signals. See here on determining trend using RSI.

Entry: Once a signal is generated, look for an entry for next 10 bars or so, until the price movement confirms the direction of signal. Trades are executed when the stock touches/breaks the nearest supp/ress.

Exit/Stop: Depends upon stock's volatility and how stronger the prevalent trend is. For example stops will be tighter in range-bound market vs. when the trend greatly favors your position

Strength: Enter fast and Exit fast, once in a position, hold as long your minimum risk/reward is maintained AND the prevalent trend favors your position. For example, I exited many positions within couple of days because stop was hit; holding SLB since 7/12 (currently ninth day) because its trend favors my position.

Costliest Mistake: Do not buy after big gap up, and do not short after big gap down. Similarly in intraday do not buy (short) after a spike up (down).

 

See attached charts for current running trade on FLS.

 

Many members were confused by what the strategy actually does, because the original thread was flooded by opinions from other 'professional' with apparently 'superior' trading strategies. The fact that these members never posted live trades/signals is left upon the readers to decide about their credibility.

 

Do or Die: I just love your posts, thank you so much , I really do.

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