Entries are not provided by divergence, at least IMHO, nor exits. As you say they are timers/indication of a trend change. You must use other things to indicate what price is good to enter/exit when divergence is apparent. There is always a "THINK" with every system, you never truly know if a trade will be succesful with any system you use, again your playing a probability that If X, Z usualy follows. Money management is also part of the system you trade which helps you when Z is pointing in the wrong direction.
GG, Definitely timing your indicators can result in price indicator(s)divergence and having the perfect interval settings can lead to profitable trades. To me, divergence is a highly reliable signal (especially if they're timed at a good setting) and I try to never avoid a divergence setup. However, knowing when to take a signal is more important. I DON'T WANT TO REWRITE WHAT NIHABA ASHI WROTE ABOVE but I agree with him totally. Everything! I have a divergence trading journal under Awash's ES Journal that you can reference. Don't take this with a grain of salt but IMHO setting your indicators is the key and what leads to divergence. I hope my reply was helpful.
GG, First of all...maybe I misunderstood your definition of a random entry. Maybe this is what you mean by random entry... Late last year for 5 trading days...my spouse randomly pick a time to enter a the ES...Long or Short based on the Dow ticker on CNBC being up of down... She would then pick a random time to exit that position... I think she had like 4 winners out of 15 trades...total loss of -27 ES points. I was profitable by +15 ES points during that same period via mainly divergence trades. (Note: We did the test out of boredom) If that's what you mean by random entry...I guess I've done the comparison. My conclusion...you can't make a living via random entry although there's a current trade journal here at ET that's testing that theory. Thus, divergence does have meaning to me... If it didn't...I would have gone bust many many many years ago. Once again...I don't use divergence via price and indicator only. Maybe that's where your methodology via divergence is flawed. I will repeat this over and over and over again... if your testing or trading divergence via price and indicator alone without seeing the bigger picture via some other confirmation... your exposing yourself to many problems with the divergence signals. Simply...you must know the strengths and weakness of your trade setups... knowing when to use them and when not to use them. Last of all...several days ago...I and another got the same entry price for a divergence trade... however...I didn't maintain discipline in my exit strategy...got +1 point out of the trade that could have easily been a loser... while he nailed a nice +4 point gain. Why the difference? Exit strategy and the trader...trade management. My point...the trader and how he interprets the price action from start to finish... will be the main reason why a trade is profitable or not. NihabaAshi
GG, If you already know this...start applying what you know and don't over-analyze a situation (price and indicator alone) you know you won't be putting your hard-earned money on. It's a wast of time...don't you think? If your using divergence...what indicator or index or price action only method are you using for confirmation of any divergence signals? I'm curious. NihabaAshi
NihabaAshi, this is exactly why i started this thread. as you said, divergence isn't all you use. that is the case for me, too. what i tried doing lately is also adding divergence as one of the conditions for an entry. so say i have 3 conditions for entry. i tried making a divergence the 4th. but after a while, i was like, what really does this divergence mean if i can get one at pretty much any time by adjusting the indicator setting, or using a different indicator?! i suppose to get to the truth, i could try trading with and without a divergence, but keeping all the other factors the same. then i could see if the divergence adds any value. without getting into exactly what i do, i will tell you in general idea how i was using divergence. say i'm looking to go short around an upper bollinger band. sometimes price will bounce right off it immediately, but other times it bounces around there a little bit before it comes down. as you know, other times it just keeps going if it is trending strong. anyway, say you want to go short. since i know price can bounce around there a little before coming down, i tried waiting for a divergence to show up. by divergence i mean between price and CCI or ROC or something. after a while, though, i just started wondering if waiting for a divergence is really adding any value, since just by changing the indicator settings or the indicator, i could find a divergence just about anywhere. plus, if you start requiring a divergence as a condition for entry, you might miss other good entries that didn't have divergences.
Yeah, there's edges available in divergence trading. Only thing I hate about divergences is you're trading against the outlier trend trades. If you don't have really good defense you can lose your shirt. Upside is also limited. Here's the results of a simple system using CCI and price divergences with daily data on the SP market since 1990. Only losing year was last year (the trendiest year for the SP since it began trading). $176,000 of the losses were in 8 trades. Good risk control could boost the results to a PF >2 pretty easily.
GG, Ok...I understand where your going with this. All I can say...keep working at it. If divergence doesn't fit well with your methodology... doesn't improve your entry or causes too many missed trades... leave it alone. NihabaAshi