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Divergence detection algorithm


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Divergence detection algorithm

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  #21 (permalink)
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folks,
great that we initiate good activity + an interesting topic here
but i would recommend to open a seperat thread for a divergence trading-discusion.
this is started to be a programming-thread.

cunparis first goal here was to code an indicator / algorithm for to give us a heads-up-diver-alert i think.

max-td
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  #22 (permalink)
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Thank you for the comments. The chart also shows that markets are assymetric, fear and greed do not create the same feedback patterns. In the stock market topping patterns take longer time than bottoming patterns. It is not unusual to see double or triple tops, but rarely you will notice a double bottom with low volatility.

I agree that MACD signals work better with a zero line cross and when volatility is high, so it might give you an edge for stock index bottoms or commodity tops. These are U-class peaks and troughs and not similar to the moderate S-class peaks and troughs.

So to apply a MACD divergence indicator, you might first need to qualify the type of market. Apply it to a high volume climax move and it might work, apply it to a wedge, and you will get a quadruple divergence, which is a failed triple and failed double divergence.

The problem of the divergence is that it only measures the peak (trough) behaviour, but not the trendline side of the price action. If you have an ascending triangle, on the peakside it creates a divergence, on the trendline side it is a continuation pattern. How would you qualify this?



shodson View Post
I attached an updated chart with notes...

Also, reversals often can have targets 2-6x larger than stops so you don't need to be right more than 50% of the time.


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  #23 (permalink)
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Sorry, read your post only afterwards, yep we can move this to a new thread. I'm happy to see that shodson has a different view than I have. This can be exploited.


max-td View Post
folks,
great that we initiate good activity + an interesting topic here
but i would recommend to open a seperat thread for a divergence trading-discusion.
this is started to be a programming-thread.

cunparis first goal here was to code an indicator / algorithm for to give us a heads-up-diver-alert i think.


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  #24 (permalink)
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Fat Tails View Post
Most trading systems based on divergences have a negative expectancy. The left chart is a good example. MACD produced a divergence, not because the trend slowed down, but because of the Baskerville effect: a moving average also barks if something drops out at the beginning of the period.

Hi there . Two things:
  1. A typical MACD is made of EMAs. Nothing "drops out" of an IIR filter.
  2. The Baskerville effect - Wikipedia, the free encyclopedia is related to psychological stress

Thanks.

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  #25 (permalink)
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max-td View Post
folks,
great that we initiate good activity + an interesting topic here
but i would recommend to open a seperat thread for a divergence trading-discusion.
this is started to be a programming-thread.

cunparis first goal here was to code an indicator / algorithm for to give us a heads-up-diver-alert i think.

Yes I was thinking the same. I like divergences and use them in my trading but they have to be taken in context. So it can be a really lengthy discussion, interesting nonetheless.

I'm really interested in the algorithm. This is one thing I've never been able to automate. Which btw, when I say automation I'm not talking about an automated strategy but rather having visual or audio alerts of divergence so that I can inspect it and decide what to do.

I haven't had time to study all the examples in depth but will get to that soon. The MT4 indicator looks the most promising but I don't know MT4's programming language and it looks a bit complicated.

I may continue my current approach, which is to brute force cover all the possible patterns between two data series. for 3 bars it's easy and a lot of the divergences I'm looking for a re 3-5 bars.

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April 29, 2010


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