S&P 500 IndexEducation
Flawed concepts: divergences
One of the reasons why a divergence on an "indicator" hasn't provided an expected result is because there was an info conflict with more data on lower resolution (aka higher timeframe was against it).
The second reason is because these indicators don't know how to distinguish buying and selling waves properly, when they start and when they end, as explained in "Real waves". Even if you pass the correctly approximated typical wave size as a lookback window length, it won't change anything 4 real.
The third reason is because these indicators actually are not supposed to be used for comparative analysis. They are what they are, they approximate slope aka direction aka gradient in given data, and some also calculate some sort of statistical limits for these historical slope values. If that's what you really need, you can simple calculate Z-scores of Close minus Open values over some lookback window, you'll do better.
As explained in "Wave exhaustion", a wave (continuous directional movement) strength is understood based on:
1) How far the price gone;
2) How much time passed;
3) How much volume got traded during this wave.
The indicators will show you a correct divergence when 2 waves have the same volume, same price range, but different time range. Volumes are completely disregarded. And most importantly, even if when volumes are the same, time is the same, but price ranges are different, it will Not show you a divergence at all. So effectively, even disregarding volume, price & time are combined in these indicators that way so comparative analysis of waves can not be done.
Many have a wrong idea is that if prices move fast (they call it strong momentum) it means motive strength. It neither confirms strength nor denies it. Time, price & volume are used together to properly understand the order flow strength, in a way explained before.
The second reason is because these indicators don't know how to distinguish buying and selling waves properly, when they start and when they end, as explained in "Real waves". Even if you pass the correctly approximated typical wave size as a lookback window length, it won't change anything 4 real.
The third reason is because these indicators actually are not supposed to be used for comparative analysis. They are what they are, they approximate slope aka direction aka gradient in given data, and some also calculate some sort of statistical limits for these historical slope values. If that's what you really need, you can simple calculate Z-scores of Close minus Open values over some lookback window, you'll do better.
As explained in "Wave exhaustion", a wave (continuous directional movement) strength is understood based on:
1) How far the price gone;
2) How much time passed;
3) How much volume got traded during this wave.
The indicators will show you a correct divergence when 2 waves have the same volume, same price range, but different time range. Volumes are completely disregarded. And most importantly, even if when volumes are the same, time is the same, but price ranges are different, it will Not show you a divergence at all. So effectively, even disregarding volume, price & time are combined in these indicators that way so comparative analysis of waves can not be done.
Many have a wrong idea is that if prices move fast (they call it strong momentum) it means motive strength. It neither confirms strength nor denies it. Time, price & volume are used together to properly understand the order flow strength, in a way explained before.
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