Trading on Divergence - suited for Rangebound or Trending Markets?

[nishantsomani]

Hello everyone,

I wish to know from all the divergence trading practitioners if the technique viz "Divergence Trading" works best in "Rangebound/Trendless" or "Trending" Markets? I dont know the theory or the logic behind in which market it should work the best BUT on my observation on which i trade, i've found and think that the divergence type trading is best suited to trade in rangebound markets.

Your views please.

Regards,

Nishant

 

[alexander]

Hello Nishant,

Good question. I had the same while back when I started trading. In my opinion you can use divergence to trade both rangebound and trending markets. During rangebound markets you may be able to identify when prices will reverse direction and during trending markets when a correction is over and the trend resumes. Also, an important use of divergence is when trying to identify the start or the end of a trend.

The best way to determine how useful is your particular divergence signal is to backtest your system and analyse carefully the results. Then you will be able to answer your questions quantitatively.

Alex

 

[FetteredChinos]

doesnt really matter which market it works in, as its almost impossible to tell at a point in time if the market is trending or rangebound.. its only really easy to spot in hindsight.

having said that, since divergance is basically trying to pick tops/bottoms, it will therefore work best in ranging markets, as by definition the market is unlikely to trend up/down to wherever your stoploss is.

hope this helps,

FC

 

[Legion]

I assume you mean Divergence of price from ? what exactly? a smoothed measure of price in the form of an indicator or , is your MIND on something else maybe?

 

[alexander]

doesnt really matter which market it works in, as its almost impossible to tell at a point in time if the market is trending or rangebound.. its only really easy to spot in hindsight.

FC

How true, if one understands this point can save a lot of money.

But you can have divergence between indicator value and price at a point on a trend (even if that is a trend in hindsight).

Alex

 

[nishantsomani]

doesnt really matter which market it works in, as its almost impossible to tell at a point in time if the market is trending or rangebound.. its only really easy to spot in hindsight.

FC

Hello again everyone,

It isn't really that. Its not about something in the hindsight as regards one may depict the market condition being a trending one or rangebound struck. Though i'm not a firm believer of indicators but ADX is the only exception to me. I have tested ADX over large data and one can fairly depict the market condition by using this Wilder's indicator. It really helps immensely in sorting the market type - though not cent percent but to a larger extent. And subsequently you can fairly decide when and how to use divergence technique once you get the hint if the market if heading towards a rangebound scenario.

Nishant

 

[dbphoenix]

Hello again everyone,

It isn't really that. Its not about something in the hindsight as regards one may depict the market condition being a trending one or rangebound struck. Though i'm not a firm believer of indicators but ADX is the only exception to me. I have tested ADX over large data and one can fairly depict the market condition by using this Wilder's indicator. It really helps immensely in sorting the market type - though not cent percent but to a larger extent. And subsequently you can fairly decide when and how to use divergence technique once you get the hint if the market if heading towards a rangebound scenario.

Nishant

If for some reason you don't want to use trendlines to tell you whether you're trending or not, consider using the DMI along with the ADX since they work together.

Db

 

[nishantsomani]

Nice to hear from you Db. I do use trendlines a lot. Further, I think its only ADX which helps in determining if a certain market is trending or not. But if in case DMI also helps in determining the same as regards whether a market is trending or not, then do throw some light over the same.

Nishant

 

[dbphoenix]

Actually, ADX doesn't do anything that trendlines don't, but that's neither here nor there. Indicators enable scanning, so ADX has its uses.

In any case, ADX is derived from DMI+/-. If you're interested in pursuing the subject, stockcharts.com has a relatively good tutorial to start with, along with chart examples.

Db