Cross Market Divergence Indicator

Cross Market Divergence Indicator

Divergence trades happen when two related markets move apart for a short time. These trading opportunities open up on a frequent basis and at every time scale.

Divergence trades are often missed or overlooked because detecting these events can be difficult. Yet these trades are often highly profitable. Trying to match markets by sight alone is prone to error and miscalculation. This indicator is designed to solve these problems. It handles all of the calculations and simply tells you when to trade.

Note: This is tool analyzes divergence between different markets. If you’re interested in oscillator divergence please see this indicator.

IN BRIEF

The indicator will automatically monitor any two markets and create an alert as soon as a trade opportunity arises. It tells you exactly when to place each trade. It’s even possible to flip the two markets where there is an inverse relationship. In short, this indicator will:

• Monitor any two market tickers
• Create alerts on potentially profitable trades
• Send notifications to mobile devices
• Handle inverse relationships
• Display strength of coupling
• Causation: Leading/trailing market analysis

For a technical overview please see here.

WHAT THIS TOOL DOES

Many financial markets are closely correlated – for example crude oil with commodity currencies as well as numerous global stock indices and specific currency pairs.

Once set on a chart this indicator will analyze the inter-relationships between the markets and find trading opportunities when there is a decoupling. These are called intermarket market divergence trades and they are widely used by institutional traders.

The indicator has a flexible setup so that it is possible to configure it for any market or any time frame. The rest is fully automated. The indicator will tell you when to place the trade, on which side, and in which market.

As can be seen from the charts below, divergence trades are often highly profitable. They are also not as prone to false signals as are more basic technical analysis methods. See this article to see how the strategy is used in practice.

EXAMPLE: NZDUSD VS AUDJPY

This example is between NZDUSD and AUDJPY. The Australian dollar and New Zealand dollar are closely tied due to the relationship between their economies. While the US dollar and the Japanese yen are frequently seen as risk-averse currencies. Therefore the relationship between the two pairs is usually fairly tight. Occasionally one market drifts either way due to economic news flow and this is where profitable divergence trades can be placed.

The chart below (Figure 1) shows the output that the indicator generates on the four hour chart.

TRADE ALERTS

The indicator can create an alert when a trade opening arises. You also have the option for trade alerts to be pushed out to mobile devices or email, thus freeing you from watching the screen.

EXAMPLE: FTSE100 VS S&P 500

It’s well known that global stock indices are closely tied to one another. For example the correlation coefficient between the UK’s FTSE100 and the US’s S&P500 is typically as high as 0.9 (see chart below).

This means there are regular trading opportunities where the two indices become decoupled for a short period of time.

The chart below shows eight trade entries generated by the indicator on the four hour chart (H4).

EXAMPLE: USDCAD BRENT CRUDE OIL

In this case the relationship is an inverse one. When the price of crude oil falls, USDCAD typically rises. Also note that the coupling is especially close here since Brent crude oil is also priced in US dollars.

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