Divergence trades

Most trades in a low volatility environment are trying to identify the end of a move and potential turning point. Chasing trades will get you caught out, until we get some larger moves this strategy is keeping the day to day PnL in the green.

What is a turning point?
It is when the supply/demand balance shifts from imbalance to balance and then back over to opposing imbalance.

So what tools can we use to identify potential turning points?
Good levels of interest can often bring in orders from new traders. So being aware of key levels such as yesterday’s high, low and close, today’s open and significant support or resistance levels can help.

Other useful indicators are the TICKS. The TICK index takes all the stocks on the NYSE trading on an uptick minus those trading on a downtick and displays the number. Generally a number below -1000 or above +1000 signifies exhaustion, depending on the context

So how do we use it?
When the market approaches a level of potential interest, we are looking for that supply/demand balance to shift. One way of gauging this is by using the TICK indicator and watching for divergence. Take the example of a falling market; a lower low in the market not accompanied by a lower low in the TICKS indicates that sellers are less aggressive, they are not hitting the bids on the stocks. Lifting offers and hitting bids is how the market moves and so if bids are not being hit the market will not move lower.

This is only part of the puzzle, a good read on the tape can help you confirm what you are seeing on the chart and on the TICKS.

Today yielded a great divergence trade

Recently there have been several opportunities using this technique, if you aren’t already using the TICKS they are well worth putting in your trading arsenal.