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The biggest lie about divergence in trading

  • #61
  • Edited 4:45pm May 19, 2016 3:26pm | Edited 4:45pm
you wana try for a new low?


edit...before you guys get too excited...im not sure we get that far down.... but a correction is very much in order
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  • #62
  • Edited 5:28pm May 19, 2016 5:05pm | Edited 5:28pm
The question is, aren't we just fooling our selves here?
that divergence can not be used alone, and it would have to be used together with other tools,
and THEN we suddenly have an edge.

I just don't see the logic in that, please hear me out, seriously.
please just think about this for a minute, because this is deep.

from where would this "edge" come from?
because it was not there in the first place, right?
was it just born right then and there, when it came into contact with this other lovely indicator?
sprung up from nothing, maybe love at first sight?

if you take any idea or indicator that shows no edge if you are trading it alone by it self,
how could that indicator or idea, possibly add any edge if you add other things to it?
this makes no sense to me, it would make no difference to the outcome as I see it,

for you guys using divergence in your trading, kudos to you if you are profitable,
all I'm saying, maybe divergence have nothing to do about it?

I seriously would not be surprised if you would get the same result.
if you traded your strategy without divergence. did you try?

I could be wrong or right, I just find this an interesting and maybe purely psychological topic.
Bulls are stupid Animals!especially when Im short!
  • #63
  • May 19, 2016 5:12pm May 19, 2016 5:12pm
I'm going to second cat on this, divergences are really powerful, esp on higher timeframes.
  • #64
  • May 19, 2016 5:22pm May 19, 2016 5:22pm
Yes, divergence is powerful & i use it.
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  • #65
  • May 19, 2016 5:59pm May 19, 2016 5:59pm
Quoting roughtrader
The question is, aren't we just fooling our selves here? that divergence can not be used alone, and it would have to be used together with other tools, and THEN we suddenly have an edge. I just don't see the logic in that, please hear me out, seriously. please just think about this for a minute, because this is deep. from where would this "edge" come from? because it was not there in the first place, right? was it just born right then and there, when it came into contact with this other lovely indicator? sprung up from nothing, maybe...
I think you have hit the nail on the head with regards to using divergence as a definitive objective measure......however in my opinion, I think it, and almost any other indicator/tool is merely a method to assist decision making and focus the trader's attention towards a particular condition of the market that might warrant attention such as an overbought/oversold condition when market conditions are fairly stable and mean reversion is the order of the day. The level of importance to a trader and the worth of such indicators to a trader may actually be a personal preference that relates to a trader's way of identifying and processing information and being able to see the 'wood for the trees'. This is not diminishing the importance of these indicators as in my opinion, this is what distinguishes a discretionary trader from a systematic trader.
  • #66
  • May 19, 2016 6:53pm May 19, 2016 6:53pm
you can trade any kind of entry whether it be S/R, trendlines, OB/OS, MACD, hidden divergence, candle stick patterns, its not so much the entry that really matters, its the exit!

It does not matter why price moves or why you think it moves, only that you understand your edge in the market from historical testing analysis.
All posts are my personal opinion
  • #67
  • Edited 7:26pm May 19, 2016 7:03pm | Edited 7:26pm
Quoting Rtm
you can trade any kind of entry whether it be S/R, trendlines, OB/OS, MACD, hidden divergence, candle stick patterns, its not so much the entry that really matters, its the exit! It does not matter why price moves or why you think it moves, only that you understand your edge in the market from historical testing analysis.
Spot on in my opinion.

What the exit and trade management practices such as position sizing are effectively managing is 'risk' and that is key to this game. Profits can occur at any time but risk is something that needs to be controlled all the time and is the only aspect of trading that you have any direct control over. You become a successful trader 'or species' because you survive in an uncertain environment. If you survive, the profits will come by default from your increased share of alpha received over time relative to the competition.

Ask yourself why are species successful? Is it through purposeful directed action or is it through possessing more robust features that are capable of surviving in a competitive and uncertain environment?
  • #68
  • Edited 10:10pm May 19, 2016 9:58pm | Edited 10:10pm
Quoting Copernicus
{quote} Spot on in my opinion. What the exit and trade management practices such as position sizing are effectively managing is 'risk' and that is key to this game. Profits can occur at any time but risk is something that needs to be controlled all the time and is the only aspect of trading that you have any direct control over. You become a successful trader 'or species' because you survive in an uncertain...
Since we're on this divergence topic, it's timely to point out the need to position oneself on the right side of divergent risk taker.
  • #69
  • May 19, 2016 10:15pm May 19, 2016 10:15pm
Quoting skyway
{quote} Since we're on this divergence topic, it's timely to point out the need to position oneself on the right side of divergent risk taker.
I like it. Great segue into an important topic about risk S :-)
  • #70
  • Edited 10:56pm May 19, 2016 10:27pm | Edited 10:56pm
Quoting roughtrader
The question is, aren't we just fooling our selves here? that divergence can not be used alone, and it would have to be used together with other tools, and THEN we suddenly have an edge. I just don't see the logic in that, please hear me out, seriously. please just think about this for a minute, because this is deep. from where would this "edge" come from? because it was not there in the first place, right? was it just born right then and there, when it came into contact with this other lovely indicator? sprung up from nothing, maybe...
That's a really interesting post, roughtrader. I generally share that sentiment and see that this is a dividing line between those who practice heuristic analysis and those how practice scientific analysis. I tend to favor scientific analysis and this principle has guided my research efforts. That said, there are at least two possible explanations for how combining two (or more) signals that each individually provide no net advantage, can turn into either a worse disadvantage or somewhat surprisingly, a net advantage (Parrondo's paradox).

Case 1 - how combining losing signals can net out worse than any individual losing signal) Assume 2 or more uncorrelated trading signals. Each signal on its own is correct only 40% of the time and for this example let's assume a 1:1 reward to risk ratio on all predictions, so the 40% "win" percentage really determines success or failure. Over a period of time (10 periods) the first signal comes out as:

Inserted Code
0123456789
WWWWLLLLLL
where an W is a win and L is a loss produced by a signal's prediction. Signal 2 covers the data as follows:
Inserted Code
0123456789
LLLLLLWWWW
When you combine both signals together, noting the net signal of a voting mechanism, (W+L = 0 or no signal, W+W = W, L+L = L) you get:
Inserted Code
0123456789
0000LL0000
where 0 means no signal and nets to 2 L or 20% of the periods having losing signals with no wins. So far no improvement - 2 periods of loss with 8 periods of inaction. Now the case of 3 signals (first 3 lines) combined in an ensemble as follows with the last line as the combination and nets out with 2 correct signals and 8 incorrect signals out of a total of 10 periods. So in this case combining 40% correct signals that are uncorrelated DECREASES the overall accuracy or win percentage of the combined group.
Inserted Code
0123456789
WWWWLLLLLL
LLLLLLWWWW
LLLWWWWLLL
----------
LLLWLLWLLL
Ultimately if you add enough signals each with no net advantage, the above will show a 100% loss or slowly approach a 100% loss on a larger data set. So this isn't going to make the heuristic crowd very happy, but there it is. Combining signals that have no net advantage tends to produce composite signals that are WORSE than the individual signals. So it only makes sense to combine signals if they have some net advantage. The machine learning method known as Boosting stresses this same fact.

Case 2: Parrondo's Paradox This case shows how it is possible to turn a combination of losing signals into a profitable one. I occasionally have seen this in my work with ensembles but can't think of an example as shown above that proves this to be the case. The key seems to be the rate at which the signals lose. If signals 1 loses at a steady pace, but signal 2 has a more volatile ratchet action, and you are able to switch between them such that you catch the ratchet up of signal 2 and only lose at the lower signal 1 rate (see picture in link above next to saw-tooth example) then you can net out a positive ride. But I must stress that this is rare.

Anyway from my experiments from combining strategies/signals by far you get the most bang for the buck if all of them are net positive or have a positive edge. As a post script, you need to watch out for what I call reverse Parrondo's paradox where the combination of two or more strategies with a positive advantage can turn into a net negative result when combined.
  • #71
  • May 19, 2016 10:35pm May 19, 2016 10:35pm
Quoting FXEZ
{quote} That's a really interesting post, roughtrader.
Thanks for sharing FXEZ. Very interesting :-)
  • #72
  • Edited 11:54pm May 19, 2016 11:05pm | Edited 11:54pm
Quoting Copernicus
{quote} Spot on in my opinion. What the exit and trade management practices such as position sizing are effectively managing is 'risk' and that is key to this game. Profits can occur at any time but risk is something that needs to be controlled all the time and is the only aspect of trading that you have any direct control over. You become a successful trader 'or species' because you survive in an uncertain environment. If you survive, the profits will come by default from your increased share of alpha received over time relative to the...
Cool Copernicus, we are coming to the point: What's the success formula ?


I think it's a half way between hazard and self-awareness. The first brings only losses, both can make you a risk manager. But IMO, in no case the genius plays a role.
  • #73
  • May 19, 2016 11:28pm May 19, 2016 11:28pm
Quoting HeyYou
{quote} Cool Copernicus, we are coming to the point: Who's going to succeed ? I think it's a half way between hazard and self-awareness. The first brings only losses, both can make you a risk manager. But IMO, in no case the genius plays a role. SOme quotes from top speculators: Discretionary (W.Buffet): "Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Systematic (Victor Sperandeo): "Making money has nothing to do with intelligence. To be a successful trader, you have to be able to admit mistakes."
Yep. I don't think intelligence comes into it if intelligence is a measure of 'knowing' or being able to predict as in my opinion the market is simply to complex to fathom. That's probably why so many of us come undone and why humility is a necessary ingredient for trading success and the ability to accept when you are wrong. However in terms of 'survival' perhaps this is a better measure of 'intelligence'.

Buffet's success probably has been chiefly a result of being a survivor which does demand a countercyclical way of viewing things in that such a philosophy ensures that competition is minimal when he strikes (by acting against the crowd). He has also made a number of bad decisons as well but those decisions have not been catastrophic for Berkshire Hathway so clearly he has been a survivor unlike say Bill Ackman or John Paulson who have probably simply enjoyed a the fruits of success from being in the right place at the right time.

At the moment I keep coming back to viewing this market like a complex ecology and what are the prerequisites for survival in an intensely competitive and uncertain environment. I am getting a bit of joy here as it is assisting me to navigate this complex domain if I view it this way.
  • #74
  • May 19, 2016 11:46pm May 19, 2016 11:46pm
Quoting Copernicus
{quote} Yep. I don't think intelligence comes into it if intelligence is a measure of 'knowing' or being able to predict as in my opinion the market is simply to complex to fathom. That's probably why so many of us come undone and why humility is a necessary ingredient for trading success and the ability to accept when you are wrong. However in terms of 'survival' perhaps this is a better measure of 'intelligence'. Buffet's success probably has been chiefly a result of being a survivor which does demand a countercyclical way of viewing things in...
I differ in this. You need some intelligence to appreciate what FXEZ wrote in post #70 let alone consider that in the 1st place, as an example.

Intelligence comes with appreciating both what we know and what we don't know at the same time, that line should be clear. It's in the lack of it that leads to the blurring of this line and it's undoing. The market is indeed complex that poses the challenge to the intelligent to emerge unique models of reduced risk taking yet at the same time place it to reap from increased potential gains.
  • #75
  • May 19, 2016 11:58pm May 19, 2016 11:58pm
Quoting skyway
{quote} Intelligence comes with appreciating both what we know and what we don't know at the same time,
Totally agree with you there S..... but where I would perhaps place more emphasis is on the 'don't know' aspect of your definition which is a rare discussion on this forum.

For example there is a clear bias on threads that focus on 'profitable strategies with perfect entries which is only relevant if you can predict the future with precision' whereas there is only a handful of threads that focus on 'capital preservation and risk diversification'. We (as a community) seem to be assuming we know the future as opposed to taking a stance that defends our position against an uncertain future.

In the former camp, there are a lot of bright sparks who in the normal sense we would view as intelligent, however isn't intelligence a measure of creative problem solving capability in an uncertain environment and 'front and centre' in that definition would be how to handle risk?
  • #76
  • May 20, 2016 12:05am May 20, 2016 12:05am
Quoting HeyYou
{quote} I actually made a mistake by quoting people I don't know so please ignore that part about Buffet etc. Anyway yes understanding the market is like understanding life itself.. no genius can do that. But some intelligence to adapt is indeed necessary .
I don't know much about Buffett either HeyYou so no probs

Yep, I would agree that the ability to adapt is a must have feature of intelligence.
  • #77
  • May 20, 2016 1:05am May 20, 2016 1:05am
Divergence comes down to how the position is managed. If the position is managed to moving in a certain direction, and then moves in that direction according to the plan(the plan you should have before making any trade) divergence is working.

If price moves against the plan, you close the position. You arent wrong, your right, you understood the market wasnt ready for the reversal. Thats a very solid decision to close the order before it moves against you. This is why trading is 80% mental.

You might only be right 20-30% of the time and you still can be a solid trader, trading any setup, as long as you can let go of trades quickly.

Why do so many traders fail ? its because they think they need to be right all the time and thats simply not the case, it comes to down to having a plan before any position is taken.

Having a plan of where you think price can go before making the trade is key. Because then it allows you to let go of something because price didnt do what you expected. As you trade more you gain the insights for this it doesnt happen easily, thats why it is important to have plan!!

Did I mention you should have a plan ?
Learn, a forex trader must, unlearn and relearn he will.
  • #78
  • May 20, 2016 1:09am May 20, 2016 1:09am
Quoting COGSx86
Divergence comes down to how the position is managed.
You also need a trading plan *sniggers* :-)
  • #79
  • May 20, 2016 1:19am May 20, 2016 1:19am
Quoting Copernicus
{quote} You also need a trading plan *sniggers* :-)
yes a plan, is very important for a plan!
Learn, a forex trader must, unlearn and relearn he will.
  • #80
  • May 20, 2016 1:35am May 20, 2016 1:35am
The biggest lie also that to believe with someone that says you could put your EA 24/5 online without having worried about Fundamental Issues as they will make your technical skills to waste! this is from my personal experience!
If you have to make a mistake, make sure it is a new one
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