divergence trading workshop day one

Divergence Trading WorkshopDay One

presented byThomas Wood | MicroQuantSM

High Probability Continuation and Reversal Patterns

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Workshop Outline

• Simple Ways to Improve All of Your Trading• Introduction to Indicators Used• General Rules for Stop Placement• Understanding Divergences• Trading “No Returns”• Knowing When a Market is Entering

Consolidation• Trading the “Golf Club” and “High Flying Flag” • Identifying Momentum Inflections

Simple Ways to Improve Your Trading Success

Tips to Improve Trading Success

“Most people will not wait for the environment to tip itself off. They will walk into the forest when it is still dark, while I wait until it gets light.” Mark Weinstein

• Never sell the highest high or buy the lowest low of momentum.

• Look at trading as a game. Do not focus on the dollar amounts gained or lost, that is just the way to keep track of your “score.”

• Only take the trades you have the highest amount of confidence in. If you ever find yourself saying “I am not really sure” then skip it and live to trade another day.

Tips to Improve Trading Success

• Watch what the price action tells you when highs/lows

or support/resistance is broken. Is it behaving correctly?

• Think for yourself. Learn your analysis and follow it.

• Make sure you are willing to change your opinion if you

are wrong.

• Every market has their own personality. Make sure you

understand the markets you are trading

Tips to Improve Trading Success

• Make sure you are making more than your risking on

your trades!

• You want a reward risk ratio of a minimum 1.5 to 1

• Make sure you are actually exiting for a valid reason. Do

not say “Oh I am up $400 I am going to close this out”

Why settle for $400 when you could have held for

$1500?

• You CAN go broke by taking profits! (I am guilty of this

saying myself)

Tips to Improve Trading Success

• Review your trades and trading strategy EVERY DAY.

• Write on a piece of paper what you are going to do every

day before you start trading. This will help you stick to

your trading plan.

• Write a trading plan.

• Know when you are having an off day and quit.

• Don’t try to “dig yourself out” this is a losing proposition.

• Treat each day as a new day starting from zero.

Analyze Three Components of Technical Analysis

Questions on Tips to Improve Trading Success?

Introduction to Indicators Used

Cannot Use White Background =(

Specifications of Natural Gas• Moves in $10.00 per tick intervals• Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1

Crude Oil (Volatility Adjusting)• Impacted by Nat Gas Supply announcement every Thursday at

10:30 AM EST• Announcement can cause major fluctuations

• Follows trendlines decently, not 100% though. • Important to pay attention to the momentum when

approaching a trendline. Can help you understand how it will react.

• Pit Hours: 9:00 AM EST – 2:30 PM EST• Majority of good setups occur 30min-1 hour before pit open.

• Best Divergences: 240 min 60 min and 30 min• Best Candlesticks: 240 min 60 min• Trade Entries Based on 100, 250 and 500 tick

ValueBars

Specifications of Natural Gas• Moves in $10.00 per tick intervals• Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1

Crude Oil (Volatility Adjusting)• Impacted by Nat Gas Supply announcement every Thursday at

10:30 AM EST• Announcement can cause major fluctuations

• Follows trendlines decently, not 100% though. • Important to pay attention to the momentum when

approaching a trendline. Can help you understand how it will react.

• Pit Hours: 9:00 AM EST – 2:30 PM EST• Majority of good setups occur 30min-1 hour before pit open.

• Best Divergences: 240 min 60 min and 30 min• Best Candlesticks: 240 min 60 min• Trade Entries Based on 100, 250 and 500 tick

MQ Momentum

Specifications of Natural Gas• Moves in $10.00 per tick intervals• Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1

Crude Oil (Volatility Adjusting)• Impacted by Nat Gas Supply announcement every Thursday at

10:30 AM EST• Announcement can cause major fluctuations

• Follows trendlines decently, not 100% though. • Important to pay attention to the momentum when

approaching a trendline. Can help you understand how it will react.

• Pit Hours: 9:00 AM EST – 2:30 PM EST• Majority of good setups occur 30min-1 hour before pit open.

• Best Divergences: 240 min 60 min and 30 min• Best Candlesticks: 240 min 60 min• Trade Entries Based on 100, 250 and 500 tick

MACD

Specifications of Natural Gas• Moves in $10.00 per tick intervals• Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1

Crude Oil (Volatility Adjusting)• Impacted by Nat Gas Supply announcement every Thursday at

10:30 AM EST• Announcement can cause major fluctuations

• Follows trendlines decently, not 100% though. • Important to pay attention to the momentum when

approaching a trendline. Can help you understand how it will react.

• Pit Hours: 9:00 AM EST – 2:30 PM EST• Majority of good setups occur 30min-1 hour before pit open.

• Best Divergences: 240 min 60 min and 30 min• Best Candlesticks: 240 min 60 min• Trade Entries Based on 100, 250 and 500 tick

Questions on the Indicators?

General Rules for Stop Placement

General Rules for Stop Placement

• You want to place your stop far enough away that if it is hit, you know you were wrong. But that if it is hit, your not going to break the bank.

• Typically I place stops above a high or low. Try to place stops beyond some type of support or resistance.

• Know when high volatility is expected because this can cause massive slippage on your stops.

General Rules for Stop Placement

• Watch what a market does if your stop is hit. Sometimes very easy to spot a “run on the stops”

• The market is designed to beat you. Make sure your stops are not getting hit at highs or lows. *Go back and analyze all the times you were stopped out. If you had given it 2-3 more ticks would you have stayed in?

• Review your trades, learn from your mistakes

Questions on General Rules for Stop Placement?

Understanding Divergences

What is a Divergence?• When the price and indicator are no longer

correlated (moving with each other)• Price continues to equally high/low prices while

indicator weakens• There can be both bullish and bearish divergences• Bullish divergence occurs when prices are equal

to, or go lower than, previous price lows while indicator goes higher

• Bearish divergence occurs when prices are equal to, or go higher than, previous price highs while indicator goes lower

Trading Divergences

• You can trade divergences on both the MQ Momentum and the MACD• MQ Momentum will identify smaller

divergences as well as large divergences • MACD will have less signals, but higher

probability (More people watch MACD)

Trading Divergences

• You can trade divergences on both the MQ Momentum and the MACD• MQ Momentum will identify smaller

divergences as well as large divergences • MACD will have less signals, but higher

probability (More people watch MACD)

Trading Divergences

• You can trade divergences on both the MQ Momentum and the MACD• MQ Momentum will identify smaller

divergences as well as large divergences • MACD will have less signals, but higher

probability (More people watch MACD)

Trading Divergences

• You can trade divergences on both the MQ Momentum and the MACD• MQ Momentum will identify smaller

divergences as well as large divergences • MACD will have less signals, but higher

probability (More people watch MACD)

Trading Divergences

• You can trade divergences on both the MQ Momentum and the MACD• MQ Momentum will identify smaller

divergences as well as large divergences • MACD will have less signals, but higher

probability (More people watch MACD)

Divergence Identification Step 1

Higher High Prices with Lower High Indicator

Divergence Identification Step 2

Divergence Identification Step 3

Entry and Stop Placement

• Once the divergence has been identified, entry occurs at any of the following: – Equally high/low prices–Broken previous high/low –At Significantly Overvalued–Once Momentum Rolls Over

• Once Position has been entered, stop is placed at any of the following: – Just beyond previous high/low (5-10 ticks)– Just beyond support/resistance

Entry at Equally High Prices

Higher High Prices with Lower High Indicator

Entry on Broken High/Low Prices

Higher High Prices with Lower High Indicator

Entry on Significantly Overvalued

Higher High Prices with Lower High Indicator

Entry After Momentum“Rolls Over”

When Do You Know Your Wrong?

• The best divergences move your direction within 1-2 bars of the interval you are trading.

• If momentum histogram spikes a significant amount on first up/down bar

• If momentum continues to climb/decline even if prices are significantly over/undervalued

Tips to Improve Success

• Make sure market reaches into the overvalued/undervalued price points

• Make sure the histogram AND indicator lines show the divergence

• Drill down for your entry.– Find a divergence on a smaller timeframe in

the same direction of your larger timeframe. This will make your entry more precise.

• Try trade 2-3 times then quit.

Questions on Divergences?

No Returns

Trading the No Return

• A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction.

• Can be both bullish and bearish. • Should reverse on same bar, if not, then the

second bar at the latest. *Use 5 Bar Analysis Period for ValueCharts/ValueBars

Trading the No Return

• A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction.

• Can be both bullish and bearish. • Should reverse on same bar, if not, then the

second bar at the latest.

Trading the No Return

• A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction.

• Can be both bullish and bearish. • Should reverse on same bar, if not, then the

second bar at the latest.

Trading the No Return

• A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction.

• Can be both bullish and bearish. • Should reverse on same bar, if not, then the

second bar at the latest.

Trading the No Return

• A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction.

• Can be both bullish and bearish. • Should reverse on same bar, if not, then the

second bar at the latest.

Questions on No Returns?

Understanding When a Market is Entering Consolidation

When is Consolidation Occuring?

• Watch Higher Highs, Higher Lows / Lower Highs, Lower Lows

• Keep Track of Trendlines• Watch for Break of Previous Bars

High/Low• Watch How Price Reacts to Break of

Previous Bars High/Low• Stop breaking and closing above

previous high/low

When is Consolidation Occuring?

• Watch Higher Highs, Higher Lows / Lower Highs, Lower Lows

• Keep Track of Trendlines• Watch for Break of Previous Bars

High/Low• Watch How Price Reacts to Break of

Previous Bars High/Low

What to do with Consolidation?

• Consolidation is a setup for new trade.

• Know that intraday market is likely to be choppy

• Watch for breakout for higher intraday volatility

• Avoid the “chop” (Markets are harder to trade during consolidation)

• Mostly Based off daily price charts

Questions on When Markets are Entering Consolidation?

Trading the Golf Club and High Flying Flag

Golf Club and High Flying Flag• Golf Club pattern is a bearish continuation pattern• Down move, followed by 1-4 higher lows, then a break

of previous bars low with strong momentum

• High Flying Flag is a bullish continuation pattern• Up move, followed by 1-4 lower highs, then a break of

previous high with strong momentum

Golf Club and High Flying Flag• Trade is entered on break of previous bars high/low• Stop is placed above/below broken bars high/low• Should at a minimum see test of previous high/low• Market should move in 1-2 bars max. If not, may be

wrong on trade• Want to see entry bar close in your direction. If not, may

want to get out• Want to see momentum stay in your direction the entire

time

How to Trade the “Golf Club” • Golf Club pattern is a bearish continuation pattern• Down move, followed by 1-4 higher lows, then a break

of previous bars low with strong momentum

• High Flying Flag is a bullish continuation pattern• Up move, followed by 1-4 lower highs, then a break of

previous high with strong momentum

• Trade is entered on break of previous bars high/low• Stop is placed above/below broken bars high/low• Market should at a minimum test the previous high/low

How to Trade the “Golf Club” • Golf Club pattern is a bearish continuation pattern• Down move, followed by 1-4 higher lows, then a break

of previous bars low with strong momentum

• High Flying Flag is a bullish continuation pattern• Up move, followed by 1-4 lower highs, then a break of

previous high with strong momentum

• Trade is entered on break of previous bars high/low• Stop is placed above/below broken bars high/low• Market should at a minimum test the previous high/low

How to Trade the “High Flying Flag”

• Golf Club pattern is a bearish continuation pattern• Down move, followed by 1-4 higher lows, then a break

of previous bars low with strong momentum

• High Flying Flag is a bullish continuation pattern• Up move, followed by 1-4 lower highs, then a break of

previous high with strong momentum

• Trade is entered on break of previous bars high/low• Stop is placed above/below broken bars high/low• Market should at a minimum test the previous high/low

How to Trade the “High Flying Flag”

• Golf Club pattern is a bearish continuation pattern• Down move, followed by 1-4 higher lows, then a break

of previous bars low with strong momentum

• High Flying Flag is a bullish continuation pattern• Up move, followed by 1-4 lower highs, then a break of

previous high with strong momentum

• Trade is entered on break of previous bars high/low• Stop is placed above/below broken bars high/low• Market should at a minimum test the previous high/low

Questions on Trading the Golf Club and High Flying Flag?

Trading Momentum Inflections

Trading Momentum Inflections

• Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are based on momentum indicator, not price action

• Enter when momentum histogram starts moving your direction again.

• Stop goes below the lowest low• Need to see momentum steadily increase in

your direction • Momentum does not have to stay green/red

Trading Momentum Inflections

• Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are stretched out a little longer.

• Enter when momentum histogram starts moving your direction again.

• Stop goes below the lowest low• Need to see momentum steadily

increase in your direction

Trading Momentum Inflections

• Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are stretched out a little longer.

• Enter when momentum histogram starts moving your direction again.

• Stop goes below the lowest low• Need to see momentum steadily

increase in your direction

Trading Momentum Inflections

• Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are stretched out a little longer.

• Enter when momentum histogram starts moving your direction again.

• Stop goes below the lowest low• Need to see momentum steadily

increase in your direction

Trading Momentum Inflections

• Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are stretched out a little longer.

• Enter when momentum histogram starts moving your direction again.

• Stop goes below the lowest low• Need to see momentum steadily

increase in your direction

Trading Momentum Inflections

• Try to time inflections with divergences on a lower timeframe

• Make sure you are projecting out where a market can go to. I.E. it should move this far if it is going to go

• Watch price action as well as the momentum, inflection more likely to happen if there are higher highs, higher lows. Etc.

• Trade in the direction of the trend (Use a trend indicator like MQ Trend or Regression)

Questions on Trading Momentum Inflections?

Profit Targets

Where to Exit?

• Identify support or resistance levels for profit targets. When a market is close to a trendline/support or resistance, it is often times drawn to that level before reversing

• Watch for divergences or a signal that suggest a market is topping/bottoming • No more higher high/higher low, entering into

consolidation, divergence, candlestick reversal, etc.• Use a value-target. I.E. Get out at significantly overvalued

if your long. • Make sure you are using a value target on same

timeframe as original setup. Don’t go long on a 240min bar and exit because a 30min bar is overvalued.

Where to Exit?

• Watch how the momentum is moving. If momentum starts to move against you, get out.

• Watch for announcements. May be a good idea to get out before an announcement comes out.

• If you cover on a trendline/support resistance line, you can always get right back in if the market breaks that price. This saves your profits if it does reverse.

• Make sure you are maintaining a high reward to risk ratio • I like to see mine >1.5 to 1

Putting it All Into Action: Chart Examples

Final Q&A

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