Thursday, August 11, 2022

Using Divergences to Keep Out of Bad Trades

The American Football season just came to an end with my team getting close to the championship but falling short again. I am a big fan of the Indianapolis Colts and we keep having a groundhog day season year after year but it is still fun to watch. We have one of the better quarterbacks in the league named Peyton Manning who macd indicator is renowned for his hard work ethic as well as his mental and physical ability on the field.

One of the things he is known for is beginning each play with up to three possible plays to run and trying to switch into the best one at the line of scrimmage based on the formation that the defense of the other team is in prior to the ball being snapped. He will check out the other team and then let his team know what the play will be using different code words and hand signals. This is called an audible for you International readers.

When he is done calling the play and the ball is snapped they do their best to execute the play and move the ball forward. When the audible results in a good play everybody loves the quarterback and says how great and smart he is. When the play turns out poorly or if he has a series of poor plays he is the biggest sham in the league and everybody cant understand why he just doesn’t go up and just start the play instead of changing it every time.

Manning’s philosophy regarding making so many play changes is that he doesn’t want to waste a play. If the original play that the coaches called doesn’t look like it will work against the formation the defense is showing he will switch out of it into a higher percentage play. I for one am happy to have that asset on my team as are the coaches. When you watch other teams play without such capability you see a lot of wasted plays.

Well, we as short-term traders have similar tools that we can use to keep us out of wasted trades and they are called divergences. I locate the divergences I use with a MACD indicator but the idea is applicable to most indicators. Many systems have been designed based on divergences alone and they can be quite successful.

The way I use divergences is mostly as a warning system. Divergences tell me two things about possible market conditions. First is that the trend I am following could be coming to an end. The second is that the trend I am following may be a very strong trend and possibly worth milking for a large trade.

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