Hi Kevin, thanks
for the response…
I won’t
post my code for the divergence indicator for reasons I stated before. But
seeing as how even s/r levels can be defined in different ways then here is the
code I use for that particular component of the indicator.
{resistance/support
levels}
r1:=ValueWhen(1,HHVBars(H,3)=1,HHV(H,2));
r2:=ValueWhen(1,r1<Ref(r1,-1)
AND Ref(r1,-1)>ValueWhen(2,r1<>Ref(r1,-1),Ref(r1,-1)),Ref(r1,-1));
s1:=ValueWhen(1,LLVBars(L,3)=1,LLV(L,2));
s2:=ValueWhen(1,s1>Ref(s1,-1)
AND Ref(s1,-1)<ValueWhen(2,s1<>Ref(s1,-1),Ref(s1,-1)),Ref(s1,-1));
So, you can
see that s1 is very simply a low with two higher lows either side, and an s2 is
an s1 low with two higher s1 levels either side. Notice there is no forward
referencing in there so the pivots get plotted including the relevant lag.
>
I would not say that crosses of pivot levels constitute divergence in my book
Neither would
I…perhaps I didn’t explain myself clearly enough, so hopefully this
will help…
When I was
designing my own divergence indicator the thing I struggled most with was
determining what periods of price behaviour were relevant to compare…i.e.
how to open and close the “windows” within which I compared the
highs/lows of the indicator with the price.
What I have
actually found is that what works best, for this purpose, is to define a
price swing (be it a correction in a trend or an intermediate reversal in a
rangebound market) as beginning when the price crosses below the r2 level. By
doing this the “divergence window” for a potential buy is opened
when the price starts to come down from a high
point (due to the inherent lag) and starts to turn
downwards. The window is then closed when the price crosses back over r2 (which
may be the same r2, or a lower one than the ‘opening’ r2)…This
defines the downward impulse as having completed, so it’s time to reset
all the “buy” variables. Obviously the opposite is true for the
sell variables.
My choice of using
r2/s2 in this way are simply a matter of having tried and tested various forms
and versions of the indicator (using s1/s2/s3 and r1/r2/r3 in all permutations)
across a broad range of markets. Hopefully the charts I posted show that it’s
not without merit…however, as Jose
has pointed out, there are other ways of defining divergence. I have found that
my way tends to capture corrective dips and also does a pretty good job of
picking the intermediate turning points in rangebound markets. It’s not
perfect, but then what is?
As for entries
and exits and all that, well that’s a different story. When I’m
using this indicator I will usually simply buy on a cross above the r1 level (or
maybe r2 depending on my confidence and the risk) following a signal. This
ensures that the price is moving back in my favour…
So, I take all
you say about fakes, fades and support/resistance …but I was simply
discussing a possible divergence indicator and strategy.
From:
Metastockusers@yahoogroups.com
[mailto:Metastockusers@yahoogroups.com]
On Behalf Of Kevin
Sent: Thursday, April 28, 2005
11:38 AM
To: Metastockusers@yahoogroups.com
Subject: RE: [Metastockusers] Re: how to determine stoploss for
divergence trading
Hello,
Thanks for posting the chart. The MACD plots makes perfect sense but I must say
that I cannot work out how your R2 is calculated, whether you are using weekly
pivots, daily pivots, etc. No matter.
I would not say that crosses of pivot levels constitute divergence in my book.
Semantics, perhaps. However, your basic idea is good but could I offer a
suggestion or two......?
I'll take that as a yes then..............
>From my own experience, I believe that pivot levels work differently in the FX
market than on stocks, although their use is perfectly valid in both markets.
IMO, the strength of pivot levels in FX trading is to provide S/R and likely
areas for a trend reversal. Once again, only IMO, when the price pushes through
a pivot level, one is looking for S/R at the next level. My sense is that this
scenario occurs more often than the price turning back around again through the
pivot level, especially at S2/R2 (during ACTIVE market hours).
With stocks, it's different story. You mention that you would be looking for a
cross above, and then, below S2 in a downtrend. I humbly suggest that a better
strategy would be to look for a cross above, and then back down, though R2.
What you are looking for here is a head fake where the market makers are shaking
out the short stops, and long limit orders, before driving the market lower
still. I rigorously tested, and traded, a successful system based upon this
principle. To test it properly was beyond the capabilities of MS so I had to
use Excel.
So, for anybody interested, here is The Holy Grail. I called it The Fade:
Long: Buy when the price crosses down through and then back above S2. Exit
either when the price crosses R2 on the same day or at the close on the
following day.
Short: Sell when the price crosses up through and then back below R2. Exit
either when the price crosses S2 on the same day or at the close on the
following day.
The problem with this strategy was getting the limit orders all in place at
market open. S2/R2 are only hit perhaps 20% of the time so there are a hell of
a lot of orders that expire unexecuted every day. For this strategy to work, it
is essential to have the orders already in the market because the spike often
happens so quickly that the move is all over by the time that you see it. I got
jack of all the typing ;-).
Regards,
Kevin
At 20:47 25/04/2005 +0100, you wrote:
I was actually referring to picking tops
and bottoms with just divergence indicators as being a mugs game . Sure it s
possible, but I would personally much rather go about that challenge with pure
fundamental analysis and any old indicator, than with purely just a divergence
indicator - for all the reasons I discussed. Perhaps in that respect I am not
so different from you, although I have never had any good experience with
Elliot and Gann. But that s another story&
As to how I code it&well yes, I can understand what you re getting at. I
use pivot levels s1, s2, s3 and r1,r2, r3 and then define the beginning/end of
corrections on crossovers of these various levels. Therefore a correction
window for a sell signal in a down trend would begin when the price crosses
above the s2 level and end when it crosses back below s2, resuming the
down-trend. Then I simply compare the indicator with price within this window.
Of course, that means that if prices run away to the upside and don t cross s2
again for ages then I m going to get a lot of divergence signals&primarily
as the first push up will often create an indicator high against which most of
the subsequent price high will likely diverge.
I ve tried to code it to pick just the primary highs and lows and found it
wanting, and so ended up with this approach. Well, like I say it works for
me&
The chart I posted used MACD Histogram as signals. I also find that the
Stochastic Momentum can give good signals.
Have attached another chart of GBP 60 minute with the MACD Histogram on it to
show you the correction divergences on that. The red line is the r2
level&crosses below this line then back above first opens then closes the
divergence window . There is one false signal that I would have ignored as it s
too close to the first cross below r2. Notice again how it all goes to pot at
the right hand side as the trend changes&
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