Why Investors Should Be Careful Using Market Divergence Signals

Nearly all technical analysts of stocks and other securities make use of technical indicators to help them make trading and investing decisions.

Technical indicators are created by applying some mathematical calculation or function to the price and volume data of an underlying security. Technical analysts frequently compare the behavior and structure of indicators with the actual price and volume information. Today, I’d like to focus on market divergence signals – what are they, why they don’t always work, and some guidelines for how we can use them as active investors in today’s market.

Divergence Defined

Comparing the two lines gives rise to the concept of “divergence” – a situation where the price of a security is moving in one direction and the indicator in the other.

A significant market divergence signal is regarded as a reliable sign of a pending price trend change. For example, if the price of a security is trending down, while an indicator has started moving higher, technical analysts will conclude that the price of the security is about to reverse and start moving higher as well.

Pitfalls of Divergence

Unfortunately, market divergence indicators happen to be the most overused and poorly understood technical concept, leading many traders to make wrong decisions about the status of the market or the likely direction of a security.

In the last 3-4 years, instances of “negative divergence” have repeatedly been cited as the reason for a pending stock market top by many bearishly inclined analysts.

Conclusion

Here are some high-level guidelines for how traders should use indicators and approach market divergence:

1. Only Price Matters – Nearly all indicators are derived from price and volume information. Your trading or investing decisions should always be driven by what the price is doing, while you can use an indicator to confirm or support the decision. It should never be the other way around.
2. Know Your Indicator – If you are going to commit capital based on any indicator (even in the supporting role) make sure you understand how it is calculated and how it behaves under all market conditions. Most importantly, make sure you understand its limitations and conditions under which its reliability is suspect.
3. No Edge In Divergence –  Price-indicator divergences frequently produce false signals and should always be taken with a big grain of salt, especially in trending markets.

How to perform a multiple time frame analysis

Most traders pick their one time-frame and then almost never leave it. Or they just leave their time-frame to go down to lower time-frames to find more trading opportunities – which basically means they are recklessly hunting for signals on time-frames they shouldn’t be on.

The professional trader knows that the only way to approach trading is with the top-down approach and you’ll shortly see why.

Top-down vs. bottom-up – the biggest mistake of multiple time frame analysis

The biggest mistake traders make is that they typically start their analysis on the lowest of their time-frames and then work their way up to the higher time-frames.

Starting your analysis on your execution time-frame where you place your trades creates a very narrow and one-dimensional view and it misses the point of the multiple time frame analysis. Traders just adopt a specific market direction or opinion on their lower time-frames and are then just looking for ways to confirm their opinion. The top-down approach is a much more objective way of doing your analysis because you start with a broader view and then work your way down.

! Tip: Doing a multiple time frame analysis while you are in a trade can be a real challenge because of the trade-attachment. Once in a trade, the supposedly objective performance then turns into justifying your trade. Especially when you are in a losing trade, you have to be very aware of how you are doing your analysis; avoid justifying a (losing) trade based on the “bigger-picture” market view.

Multiple time frame analysis helps you stay open-minded

Obviously, the daily time-frame is less important if you are trading off the 1 hour time-frame. However, a trader who never leaves his execution time-frame has a very narrow view on the market and cannot put things into the right context.

Every trader, regardless of his main time-frame, should has to start his trading day looking at the higher time-frames to be able to put things into the right perspective. But looking is not enough because once you arrive at your lower time-frame and are in the midst of your trading session, you will have forgotten what you saw on the higher time-frames. There are two ways to deal with this problem:

1) Get a physical notepad

On your trading desk, place a physical notepad and for every market you trade, write down what you saw. We also offer a free trading plan template that can help you stay organized.

2) Annotate your charts

All charting platforms offer text objects and you can use them to directly write on your charts. It is also advisable to mark the areas on your chart that are your areas of interest. This way you are less likely to jump the gun and enter prematurely.

Multiple time frame analysis – step by step

When it comes to actually performing your multiple time frame analysis, you don’t have to get too fancy. But knowing what to do and how to approach it can help you build a time effective routine that guides you through your trading sessions.

Weekly / Monthly  – Where are we?

If you mainly use the 4 hour or 1 hour time-frame to execute your trades, you don’t have to spend too much time here. Basically, you just want to get a feeling for the overall market direction and if there are any major price levels ahead. Especially long-term support and resistance or weekly or annual highs and lows should be marked on your charts

Daily – Strategic time-frame

On the daily time-frame, you have to spend a bit more time on. Here you analyze the potential market direction for the week ahead and also determine potential trade areas. Again, draw your support and resistance lines and mark swing highs and lows – even if you don’t use them in your trading, it is worth having them on your charts because they are so commonly used.

4H (1H) – Execution

Assuming that the 4 hour is your execution time-frame, this is where you map out your trades and specific trade scenarios. Take the levels and ideas you came up with on the daily time-frame and translate them into actionable trade scenarios on the 4 hour time-frame.

Ask yourself where you would like to see price going, what has to happen before you enter a trade and what are the signals you are still missing.

Staying open minded – 2 tips

Always create long and short trade scenarios when doing your multiple time frame analysis. This will keep you open-minded and it avoids one-dimensional thinking. A trader who is only looking for short trades, will blank out all signals that point to a long trade. Or, a trader on a long trade will miss the signals that could signal a reversal.

Furthermore, separate your charting from your actual trading platform. If you can see your open orders on your screens during your analysis, you are much more likely to be biased during the analysis

The First 12 Questions for a Trader to Answer

1. What time frame will you be trading in? This establishes your needed screen time.
2. What will be your specific entry signals? What price action or technical indicators will get you into a trade?
3. What will be your specific exit signals after entry? Stop loss, trailing stop, or price target.
4. How much are you willing to lose per trade?
5. What risk/reward ratio are you looking for in your trading?
6. What win percentage do you need to be profitable with your risk/reward ratio?
7. What are the probabilities of a draw down with your win/loss probabilities and risk per trade?
8. How many trades a month do you need ideally to hit your annual return goals?
9. How much will your commission costs for your trading activity level be as a percentage of your account monthly?
10. Do you have a trading system?
11. Do you have a complete trading plan?
12. Can you follow your plan and system with discipline?

Trading Mentor : How to choose and why?

“There are two ways to receive wisdom: mistakes and mentors” – Mike Murdock

Just ask yourself "Are you still willing to make more mistakes or its a time to choose right Trading Mentor?"

If you are willing to repeat the same mistakes over and over again you are free. But if you are looking for the second alternative then let us guide you on that.

If you look up “mentorship” on Wikipedia you will find the term defined as, “a developmental relationship in which a more experienced or more knowledgeable person helps a less experienced or less knowledgeable person—who can be referred to as a protégé, or apprentice — to develop in a specified capacity.” The advantages of learning any skill or trade from a mentor are numerous. Some of these include; a drastically reduced learning curve, faster achievement of long-term goals in the given skill or trade, reduction in time spent doing trial and error, more personal time, greater emphasis on the more important aspects of the given skill or trade, the list of benefits that you reap from employing an experienced, credible and knowledgeable mentor in any field are almost limitless. That being said, not all mentors are legit, especially in the world of trading, so when looking for a quality Trading mentor we need to look for specific characteristics that make them credible.

The value of learning a skill from a mentor

There are a few different ways that we as human beings learn a new skill or acquire more knowledge; one of these is self-education, many people teach themselves how to play an instrument or how to cook. Usually things that people self-educate themselves in are intrinsically satisfying, meaning they provide a person with an internal sense of gratification and achievement. Our natural talents in certain skill sets prime us to self-educate ourselves in skills that are most gratifying to us. Another way human beings learn is through a systematic education, via a public or private school. This type of learning is acquired from taking instruction from someone that is certified to teach material on a specific subject. Once we complete enough course work in a variety of subjects we attain a diploma or college degree that symbolizes our mastery in a particular field of knowledge. However, a college degree is not always synonymous with a specific industry-related skill.
It is the acquisition of a specific skill set that makes an individual employable, whether its employment with a company or self-employment. Even if you do have a college degree most job-specific skills are acquired via on-the-job training from a person who has the experience to train you in the specific job you are learning. A person who takes you under their wing and trains you for a specific skill is considered a mentor. Generally a mentor will train someone based on their own experience in the field, this means that a mentor has already made all of the mistakes any beginner will make and has learned the tough lessons that accompany any worth-while endeavor.

Why you need a mentor to help you learn how to trade

In trading, more so than other fields, there are numerous mistakes that most beginners make, and they usually end up making many of the same mistakes over and over. So by getting taught the intricacies of trading by someone who has already traveled down the rough and rocky road that all novice traders must take, you can essentially make your journey to  trading success a great deal smoother than those that refuse to get mentored by a Trading professional. In  trading, almost all of the early mistakes you will make result in you losing money, this is a big difference from most other professions, which is why having a credible and experienced mentor in the world of trading is so critical to your success as a trader.
Unless you are a total beginner to trading and this is your first day reading about trading strategies then you no doubt have realized that there is a jungle of stocks and other trading related information available for you to digest. Some of it is quality information; the great majority of it is someone trying to make a quick buck preying off of less knowledgeable peoples’ hopes at making money in the markets. The amount of trading information and different trading courses for sale by people of questionable credentials can actually seem quite over whelming to someone that is relatively new to the world of trading.
So, if we can agree that we definitely will greatly benefit from a mentor,then our next logical step would be to seek out a credible and experienced mentor, preferably someone who practices what they are preaching to you, offers on-going support, and is able to easily be contacted whether through email or phone. The bottom-line is that someone who is just out to make a quick buck and does not care about their own reputation or the morality of their actions will not have any of these previously mentioned characteristics. So let’s dive into what exactly you should expect from your Trading mentor.

What you should look for in a trading mentor

The first thing a mentor should do is help you believe in the trading method they are teaching and gain confidence that it’s worth learning, so that you can then commit to it and study it. You obviously want your mentor to fully believe in the method they are teaching you and to be an active trader of it. This is important, because if a mentor cannot properly describe his or her trading method to you and make you believe in it like they do, it pretty much shows that they don’t believe in it themselves, or trade it.

A cold hard fact of trading is that whether you are trading Forex, stocks, or commodities, trading is one of the most difficult endeavors to properly wrap your mind around. Many so called “market gurus” or “mentors” do not actually trade for themselves, they have long since given up on trading and decided instead to take the low road and sell something to people that they themselves do not believe in. If your Trading mentor is truly a trader him or herself, they will have no problem discussing specific trades with you via email, answering your questions about specific trading setups, or giving you their current view on a market.
The next big question we need to ask about our mentor is do they practice what they preach? Do they trade the same exact way they are teaching people to trade? A mentor that provides their students with a trading discussion forum or daily market commentary where they give you regular market insights and updates, is definitely something any legit mentor should do. This shows that they are currently active in the market and connected to it with passion, any trader or mentor worth a grain of salt will provide this service or something similar. The bottom line here is that any credible and legitimate mentor will be trading the same way they are teaching, if their strategy is truly effective and worth learning.

In closing

The importance of finding a credible and experienced Trading mentor can not really be emphasized enough. There is so much misleading information in the Trading world that it really can be a chore just to separate the genuine mentors from the charlatans trying to take your money and run. If your Trading mentor meets all of the criteria discussed in this article then they are most likely legit and will help you get on the road to consistent profits much faster than if you go it alone. At Dev Advisory Services, we believe we fulfill these important requirements that are crucial to a trader’s learning experience and trading career in general. Don’t take our word for it..just check out our consistency and accuracy on our Facebook Page Dev Advisory Services where we keep posting our views and also on twitter @devadvisory9939.

The 7 Habits of Highly Profitable Traders

Here are seven simple ways to move into the top 10% of traders that are profitable long term. 90% of traders do not do these seven things, you can start to do them tomorrow with the right homework and diligence.

1. Profitable traders are trading a winning system based on buy signals and sell signals that create good risk/reward ratios based on historical price patterns.
2. Profitable traders have trading plans. They know where they are going to buy and sell if they have the opportunity before the trading day begins.
3. Profitable traders trade with a position size that does not put their trading account or lifestyle in danger if it is a losing trade.
4. Profitable traders are always looking to go in the direction of the trend for their time frame, the path of least resistance to profits is their goal.
5. Profitable traders are able to be contrarian and buy breakouts and sell breakdowns short They can also buy fear and sell greed when their system says it presents a good trade opportunity.
6. Traders that trade price action instead of their opinions can be very profitable because they are not trying to beat the market they are trying to follow it.
7. Traders that trade their predictions, opinions, and egos for listening to what the market is saying through price action can make money over the long term.

Profitable traders trade profitable systems with discipline and the right position sizing while unprofitable traders look for predictions and trade too big, too much, and too randomly.

The Psychology Behind Casinos And The Stock Market

Traders don’t like it when their profession is compared to gambling (and vice versa) because they believe that in trading skills determine if you come out ahead, whereas gambling is seen as a pointless endeavor where skills do not exist and only the desperate people are hoping to hit the jackpot.
However, in today’s world, the stock market has become a topic that you can read about in the news daily or watch 24/7 TV coverage of what is happening in the markets around the world. The way the stock market and trading is displayed and talked about has shifted significantly from sophisticated investing to sensation driven entertainment.
The implications of such a presentation and the impacts on the mindset and on the trading approach can be significant, without people even knowing how and why their trading decisions are being manipulated and impacted. The following article has been inspired by a chapter from the book “The indomitable investor : why a few succeed in the stock market when everyone else fails” where the parallels between the world of casinos and the stock market are compared.

Casino vs. Stock Market

Casinos:
When people go to the casino, they often have a very detailed game-plan about how disciplined they are going to play, what their risk limit is, how much they are willing to lose at most and plans about leaving with more than what they came with. However, the casino managers are aware of the ‘preparation’ of the average gambler and they found ways to trick them into abandoning their good intentions.

• Free alcoholic drinks to seduce people to take more risk than what they had planned
• Women and other attractions to create arousal and to stop people from thinking too much about risk and potential losses
• Bright and flashy lights and sounds to create a casual atmosphere with lots of excitement
• Everything in a Casino is designed to make you want to spend your money, often created by professionals with a psychological background, including odors, sounds, patterns of the carpets, etc.
• Casino chips are used to make you forget you are actually playing with real money

The Stock Market:
Although trading and investing is a very hard thing to do successfully, the way the media presents investing in the stock market is comparable to a large scale casino where the only goal is to create attention, excitement and awaken the hopes of people who are looking for a fast buck. The following attributes of the mainstream media and trading websites often create a wrong impression of trading and can be the cause of a negative trading performance:

• TV channels and newspapers use attention grabbing headlines and slogans to attract people
• Pictures and photos of young , rich men are used to awaken hopes and dreams of a certain clientele
• The hosts of investing shows have often little to do with sophisticated investors, but are very emotional to draw a lot of attention
• If there are extreme rallies you can read and hear about it everywhere and you can witness that even  ‘the average Joe’ now suddenly sees himself as an investor

Research on investor behavior and media coverage

The fact that financial media and the media coverage is impacting investor behavior is widely researched and 3 findings stand out which highlight the impacts of financial media:
1) Attention-grabbing events lead active individual investors to be net buyers of stocks.
2) Individual investors are more likely to trade an S&P 500 index stock after an earnings announcement if that announce­ment was covered in the investor’s local newspaper.
3) Investors who have never previously owned a stock are more likely to buy when stocks reach upper price limits such as all-time highs.
You can read more about research findings and find the respective references in our other article.
Taken together, these three findings show that the media has a big influence on how the average investor makes his decisions. Furthermore, even if you think that you make your decisions completely independent, being exposed to very emotional and convincing reports or announcements can lead to trading decisions that deviate from your original plan. The next points will show how a trader can protect himself from such negative influences.

Implications for your own trading and tips to counteract the outside influence

#1 “Think slow to think at all”

Before you make a decision, think about what caused to you think in a certain way. Before entering a trade, ask yourself whether the trade idea is based on sound principles and your trading rules,or did get you the idea from an outside source? To be profitable over the long-term, a trader has to make his decisions self-determined and based on his own research.
“Give a man a stock tip, and you feed him for a day; show him how to trade, and you feed him for a lifetime.” – Modern_Rock

#2 Who do you engage with during trading?

It is OK to interact with other traders and talk about experiences or personal views. But during trading sessions, traders should be somewhat isolated. Being active in forums, trading chat rooms or listening to financial news can influence your own decision making process. Amateur traders often look for outside confirmation when a trade goes against them and then they ask other traders, often with completely different trading methodologies, why a trade is still good.
“When a trade goes wrong if you’re looking for confirmation bias instead of hitting stops, you don’t have the mental strength to be a trader.” – Assad Tannous

#3 Check your surroundings

As we have seen above, the atmosphere in casinos can have big impacts on how we perceive risk and act in situations. Therefore, be aware of the music you play while trading and avoid anything that is too arousing – some traders report that they listen to classical music during trading sessions to keep their level of arousal low. Do you really need to have CNBC running at all times? To bypass periods where nothing happens, do you watch funny YouTube videos or engage in any other activity that could have an impact on your mood?
This point might sound over the top, but everything around us, and the activities we engage in have a direct impact on how we perceive risk and make our decisions, even though we might not be aware of it at first glance.

#4 The colors on your chart

Although I wasn’t able to find a piece of research about this topic, it can be assumed that the colors we use in our trading platforms impact how we perceive the current price development. All our lives we are primed to respond to the two most commonly used signal colors red and green. Whenever we see green, it means go and everything is good, whereas red signals an immediate stop or danger.
Are traders more likely to engage in impulsive trading decisions when they are currently faced with a big green or red candle? Very likely. Are you more likely to close a buy trade when the current candle is red? Possibly. Even if the impact is minor, a trader should grab every possibility to put the odds a little more in your favor should be embraced.

The Real Reason We Trade Emotionally

 We'll give you a view you won't hear from any mentor, coach, guru, or furu.

Why do so many traders talk about trading being a mental game and making bad trades because of emotions? Why do you find yourself making the same mistakes again and again, making money only to lose it?
Is it because you lack discipline? Is it because you cannot control your emotions? Is it because you don't stick with a trading process?
No.
You have emotional problems in markets because you're the market's bitch.
You heard me right, Mr. Independent Trader who doesn't want a 9 to 5 job and wants to only work for himself. You're the market's bitch.
From open to close, you're hanging on every market tick, letting it sway your thoughts and feelings.
When the market treats you well, you feel good. When it treats you poorly, you feel like crap. When the market's not moving, you don't know what to do.
If you behaved that way in any relationship--with your boss at work or your spouse at home--everyone would see that you're someone else's bitch. But with markets, you tell yourself it's dedication, it's a passion for trading.
Bullshit. You the market's bitch.
You have a relationship with the market and anytime you're controlled in a relationship, you're the bitch.
The only way to have an even relationship with the market is to control when you play, so that you don't get played.
That takes rules, that takes finding and sticking to edges--and it takes the willingness to not play when your edges aren't screamingly apparent.
What you got ain't passion for trading; it's a need to play.
If you need to play, you're going to get played. You're going to be controlled by market behavior. You're going to be the market's bitch