Philosophy
This study attempts to redefine divergence by allowing flexibility in the established mantras associated with the subject. The traditional interpretation is that if price is going in one direction and the momentum indicator in the opposite direction, divergence is occurring and suggests that the trend is ending. The reality is of this basic theory is that all but the strongest trends will diverge and often give false exit signals to trend following trades and false reversal signals against the trend.
The increased flexibility derives from the ability to not only look for divergence on the indicator itself, but replace this with a moving average of the indicator in or order to smooth out and reduce the number of turning points. The traditional mantra looks at absolute highs and lows of price to define divergence but this study enables the trader to select what price should be used to qualify. This means if for example the relationship of the close instead of high and lows is used, it reveals the ability to quantify divergence in sideways markets in order to produce and early warning to a break out and new trend. This is referenced as divergence as a continuation. This use of different momentum indicators and variables of them to create divergence enables the trader to define how aggressive or conservative they wish there signals to be.
Interpretation
Each momentum indicator used for divergence has different characteristics and therefore different trading opportunities. Historical volatility is not an absolute track of momentum in itself and therefore signals should not be interpreted as defining beginnings or ends of trends, but rather changes in the underlying characteristics of the market itself.
HvlDiv Parameters
|
Name |
Default |
Definition |
|
N |
1 |
Number of divergence patterns that are needed to produce a signal. Most only need 1 and will not produce signals if increased. |
|
Period |
5 |
Qualifies a propriety area within which signals do not have to be symmetrical. |
|
MA Period |
1 |
This second period refers to the variable of the moving average. Setting it to a number beyond 1 means that the average is being used as the divergence tool and not the original indicator. |
|
HVol Period |
10 |
Hvol variable to be used in the divergence calculation providing the Period of the Ma is set at 1. |
|
Lookback |
25 |
Qualifies the lookback period for when divergence can occur within. Increasing the number will normally increase the number of divergence signals and for slow moving indicators should be raised from the default. |
|
MA Type |
MA Types: •Simple •Smoothed •Exponential •Weighted •Centered •Median •Trix •Exponential Hull |
Qualifies the type of moving average to be used. |
|
HVol Type |
Percent |
The calculation of volatility. |
|
HvlDivDn |
High |
Qualifies the relationship within the change in direction of the indicator and the subsequent bar value to be recorded at that point. |
|
HvlDivUp |
Low |
Qualifies the relationship within the change in direction of the indicator and the subsequent bar value to be recorded at that point. |
|
HVol Ann. Factor |
250.0 |
Number of trading days in a calendar year. |