Divergence and stochastic indicators in general are like traffic lights: they will tell you when your car can start, not where or how far it can go ... It is not indicators that make market move it is market forces that make indicators move. But random walk can also make such divergence so to distinguish between the two you must use outer knowledge in complement like trend, exhaustion zone. Since for most trend cannot also be known for sure they make an hypothesis on the trend, then will use the divergence accordingly to this hypothesis that is to say they use implicitely conditional probabilities. And like in statistical test they will suppose they are right until proven wrong (it is better to prove that you are right but statistically it is difficult - for proving that you are right you must use another framework in complement to statistic framework).
Aston, Are you still alive? If the answers I sent you via private message wasn't helpful...let me know. Also, if you have time or bored...my prior posts at this forum will answer your questions. http://www.elitetrader.com/vb/search.php?s=&action=finduser&userid=9117 Hopefully I'll run into you in some of the realtime chat rooms and we can discuss and share some info during realtime trading conditions to better explain things... especially when bored during the dead zone. (Note: I'm on IRC as NihabaAshi) Take care and good luck. NihabaAshi
For anyone interested in seeing how some outstanding traders benefit from divergence in trading ES and NQ, this week NihabaAshi is providing entrance to his trading room, without need of a password. PM him and ask for information on how to gain entry. There is no fee, and from the two weeks I've spent in the room I can tell you that there is much to be learned from watching some very experienced hands at work. Although I've been swing trading equities very successfully for 3 years, I had my doubts about intraday trading of futures. But the doubts have been erased while watching some excellent trades being logged in real time.
Learn to read reverse divergences. These are signals with the trend and are extremely reliable. In essence it is a way of reading a pullback and giving you the extra confidence that it is in fact a continuation of the trend. Take your reg divergences at support and resistance, fibos or pivots when they make sense. Make triple divergence a requirement if you need to. Support your divergences with a momentum, volume and moving average indicator. Divergences Rule.
good advise Visiontrader Be Prosperous Be well NQoos more on divergence here www.nqoos.com/Divergence.htm
backtested divergences between NQ an ES intraday , using tradestation or some other software ? I know just on feel alone ... I see these things even overnight ...
I'm fairly certain that I already posted on this thread before, but let me say it again. Do you really need a "divergence" of some kind to identify a double top or bottom? Is the price action really not clear enough? That is all that divergences are really expected to uncover, and their batting average is about as successful as the simple observation of a double top or bottom (subject to an actual trading plan aside from the observation itself). And since trading should allegedly be kept as simple as possible, how many consultants (i.e., indicators) do you actually need to tell you what time it is?
As some have mentioned already in this thread... divergence doesn't only occur between price and an indicator. Divergence signals are used by traders making trade decisions via indicators and by traders making divergence trade decisions via price action only methods. I use both and both requires just as much study, preparation and concentration. Also...divergence signals don't always occur at a top or bottom... it can occur in pullbacks as a Long signal after a top or as a bearish signal as a failed counter-thrust after a bottom. Simply...divergence is bigger than many traders think something some of us have been discussing in private message. Therefore, to answer your questions... Do you really need a "divergence" of some kind to identify a double top or bottom? Nope...many other trading tools to help traders to target a top or bottom. Is the price action really not clear enough? Not always...especially when there's divergence in whatever your trading while market breadth indices are flat or indecisive. Last of all...what may be simple to one trader...may be complex to another or vice versa... this is obvious via the numerous debates at ET about what's simple or easy to understand. I truly wish trading was easy. If it was easy...the Psychology thread here at ET may be empty NihabaAshi