Recreate "Precision Divergence Finder Indicator"?

January 24th, 2011, 02:29 AM

Fat Tails

The divergence finder is based on the Demand Index by James Sibbet.

As far as I know, there is no version of the Demand Index for NinjaTrader, so the first step would be to code the Demand Index. Below is a link with the code and some explanations.

Re: Sibbet's Demand Index, Omega TradeStation Email Archive | PureBytes.Com

Further information on the Demand Index can be found in.

Robert W. Colby: The Encyclopedia of Technical Market Indicators
Thomas E.Aspray: Fine-Tuning the Demand Index in TASC Vol. 4:4, pp 141-143

V.4:4 (141-143): Fine-tuning the demand index by Thomas E. Aspray

Once you got the Demand Index you need to look for divergences. The divergence finder possibly scans for divergences, using different periods for the Demand Index and then adds them up.

The idea is not bad at all. Divergence stands for a weakening = loss of momentum of a prevailing trend, not yet its reversal. If the trend is weakening across various timeframes a reversal might be imminent.

However, I believe that the indicator also will produce a significant number of false signals, as is usually the case with unfiltered divergences.

Perhaps another way to scan for divergences is to have a correlation indicator that shows the correlation for a certain lookback period between the Demand Index and closing price. If the correlation falls below 0.4, we have a divergence and if it falls below 0, we have a negative divergence. I could find a correlation indicator in NT that shows correlation between 2 instruments but not between an indicator and price. If someone could code such a correlation indicator, if could flag out divergences between price and any momentum indicators (e.g. Demand Index, RSI, MACD Histogram, CCI, etc).

January 24th, 2011, 01:52 PM

Managed to code the indie to show the correlation between Demand Index and price in the Thinkorswim platform. When the indie drops below 0.4, we have divergences between the Demand Index and price. A possible trading strategy would be trade in the direction of prevailing trend whenever the indie crosses back above 0.4. The Thinkscript code are given below:

#hint:<b>Demand Index</b>\nDeveloped by James Sibbet, the Demand Index is a market strength study that calculates a ratio of buying to selling pressure. It incorporates price and volume to indicate a change in price trend.
#hint length: The number of bars used to calculate the Demand Index. <b>(Default is 5)</b>

declare lower;

input length = 5;

def wClose = (high + low + 2 * close) * 0.25;
def wCRatio = (wClose - wClose[1]) / Min(wClose, wClose[1]);
def closeRatio = 3 * wClose / Average(Highest(High, 2) - Lowest(Low, 2), length) * AbsValue(wCRatio);
def volumeRatio = Volume / Average(Volume, length);
def volumePerClose = volumeRatio / exp(Min(88, closeRatio));
def buyP;
def sellP;
if (wCRatio > 0) {
buyP = volumeRatio;
sellP = volumePerClose;
} else {
buyP = volumePerClose;
sellP = volumeRatio;
}
rec buyPres = if IsNaN(buyPres[1]) then 0 else ((buyPres[1] * (length - 1)) + buyP) / length;
rec sellPres = if IsNaN(sellPres[1]) then 0 else ((sellPres[1] * (length - 1)) + sellP) / length;
def tempDI;
if ((((sellPres[1] * (length - 1)) + sellP) / length - ((buyPres[1] * (length - 1)) + buyP) / length) > 0) {
tempDI = - if (sellPres != 0) then buyPres / sellPres else 1;
} else {
tempDI = if (buyPres != 0) then sellPres / buyPres else 1;
}
def DMIndx = if IsNaN(close) then Double.NaN else if tempDI < 0 then -1 - tempDI else 1 - tempDI;
plot ZeroLine = 0;
plot DivergenceLine = 0.4;

input LookbackPeriod = 20;

plot Corr = correlation(close,DMIndx, LookbackPeriod);

Corr.setDefaultColor(GetColor(1));
ZeroLine.SetDefaultColor(GetColor(5));

DivergenceLine.setDefaultColor(GetColor(2));

January 24th, 2011, 02:04 PM

Better Momentum for NT7 from Emini-Watch has a divergence indicator built in. If you purchase it, you also get a version that allows you to apply the divergence function to any other indicator of your choosing. For example, you can apply the divergence dots to RSI or Stochastic if that suits you. Pretty reasonable at $170.

January 24th, 2011, 07:09 PM

wccktrader

Managed to code the indie to show the correlation between Demand Index and price in the Thinkorswim platform. When the indie drops below 0.4, we have divergences between the Demand Index and price. A possible trading strategy would be trade in the direction of prevailing trend whenever the indie crosses back above 0.4. The Thinkscript code are given below:

Thanks for posting the code. But at first sight I have some difficulty to imagine a trading strategy using this indicator, but then I have no experience with the Demand Index.

Divergences have me gotten in trouble quite often, so I believe that you need additional filters.

January 26th, 2011, 08:35 PM

Fat Tails

Thanks for posting the code. But at first sight I have some difficulty to imagine a trading strategy using this indicator, but then I have no experience with the Demand Index.

Divergences have me gotten in trouble quite often, so I believe that you need additional filters.

I you don't make sure you are very intimate with divergence produced by your particular indicator, you will loose your shirt... and probably your pants!

January 27th, 2011, 01:08 AM

monpere

I you don't make sure you are very intimate with divergence produced by your particular indicator, you will loose your shirt... and probably your pants!

Thanks monpere. I have just backtested the divergence indicator with another trend following indicator for entry, and exit using an ATR trailing stop indicator. The backtesting results looks good but walk forward analysis results is not good. This confirms that I will loose my shirt trading divergence in real time. Nonetheless, I think divergence may serve as a tool to alert me to have a second look at price actions.

January 27th, 2011, 02:15 AM

Removed text somebody allready sent info here.

January 27th, 2011, 05:14 AM

wccktrader

Thanks monpere. I have just backtested the divergence indicator with another trend following indicator for entry, and exit using an ATR trailing stop indicator. The backtesting results looks good but walk forward analysis results is not good. This confirms that I will loose my shirt trading divergence in real time. Nonetheless, I think divergence may serve as a tool to alert me to have a second look at price actions.

What do you use to do walk forward testing?

January 27th, 2011, 05:56 AM

monpere

What do you use to do walk forward testing?

Ninjatrader 7. Optimization with genetic optimizer using 6 months of hourly data and walk forward for the next 6 months.

February 5th, 2011, 06:54 PM

Fat Tails

The divergence finder is based on the Demand Index by James Sibbet.

As far as I know, there is no version of the Demand Index for NinjaTrader, so the first step would be to code the Demand Index. Below is a link with the code and some explanations.

Re: Sibbet's Demand Index, Omega TradeStation Email Archive | PureBytes.Com

Further information on the Demand Index can be found in.

Robert W. Colby: The Encyclopedia of Technical Market Indicators
Thomas E.Aspray: Fine-Tuning the Demand Index in TASC Vol. 4:4, pp 141-143

V.4:4 (141-143): Fine-tuning the demand index by Thomas E. Aspray

Once you got the Demand Index you need to look for divergences. The divergence finder possibly scans for divergences, using different periods for the Demand Index and then adds them up.

The idea is not bad at all. Divergence stands for a weakening = loss of momentum of a prevailing trend, not yet its reversal. If the trend is weakening across various timeframes a reversal might be imminent.

However, I believe that the indicator also will produce a significant number of false signals, as is usually the case with unfiltered divergences.

I looked at these sites and did a Google search on James Sibbet and Demand Index. The best I could do was find some code developed by eSignal and some in Trader's Laboratory.

I was unable to find any in Ninja. More interesting, I could not find any of James' original work. I did, however, find this same quote in several places:

The Demand Index, developed by James Sibbet, combines price and volume in such a way that it is often a leading indicator of price change. The Demand Index calculations are too complex, however, for this text. The calculations require 21-column accounting paper to calculate manually.

There are six "rules" to the Demand Index:
A divergence between the Demand Index and the price trend suggests an approaching weakness in price.
One more rally to new highs usually follows an extreme peak in the Demand Index (the Index is performing as a leading indicator).
Higher prices with a lower Demand Index peak usually coincides with an important top (the Index is performing as a coincidental indicator).
The Demand Index penetrates the level of zero indicating a change in trend (the Index is performing as a lagging indicator).
When the Demand Index stays near the level of zero for any period of time, a weak price movement that will not last long is indicated.
A large long-term divergence between prices and the Demand Index indicates a major top or bottom.

The reason I think everyone is quoting each other is they use the same line:

The Demand Index calculations are too complex, however, for this text. The calculations require 21-column accounting paper to calculate manually.

I'm not sure, but can you even buy 21-column accounting paper anymore?

So although I have this code in Language 'X', I am not sure when I get done moving it to Ninja if I have the right logic. Code isn't worth much if the logic is wrong from the get go.

Anybody have any thoughts on where to find James Sibbet's original logic?

Gordo

Recreate "Precision Divergence Finder Indicator"?

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Recreate "Precision Divergence Finder Indicator"?