Divergences

It sure has been along time since my last post. I really lost interest in posting for a while, but think that it would be worthwhile to continue to post and record my experiences in trading. I have been working a bit on my trading psychology, but I'll get into that more in future posts.

Today, I want to post a little about divergences. One of Linda Raschke's trading patterns is a 10 day divergence, referencing price levels against the highs and lows of the 3-10 oscillator. She discusses this more in her presentation of 5 Trading Patterns, and it has become the only indicator that I use. I also use a moving average- a 20 bar EMA, but that's all. Linda's trade is based on a 10 day divergence- 10 days from price low to price low. Sometimes it is 9, or maybe 11-12 days, but pretty much around 10 days. This is also a very similar to her turtle soup pattern, written about in Street Smarts.

Trader Vic Sperandeo discusses what he refers to as a 2b pattern, this is not always 10 days- it can be less or greater, and does not use an oscillator. Read more in "Trader Vic" for this pattern. It is good for picking up short term trend direction changes, and is a pattern that I will be using more.

Refer to the below chart of November soybeans, and look at the arrows on both the price chart, and 3-10 oscillator.

You will see that for the 1st, 2nd, and 4th set of prices, the price bars make new lows, but the blue line of the oscillator (sometimes referred to as the fast line) makes higher lows. Hence, the divergence. For the 3rd set of prices, the price bars make new highs, but the fast line is making a lower low.

Sometimes there is a small reward, and sometimes big. It will be interesting to see where this most recent trade goes, as Friday's price bar is hitting the 20 day EMA.