“Hi Michael, do you think that hidden divergence is a good indicator of trend continuation after a retracement? Thanks in advance.”
Jeff, exact definitions of ‘hidden divergence’, ‘trend continuation’ and ‘retracement’?
“Hidden divergence is defined as follows (from http://www.babypips.com/school/hidden_divergence.html): If price is making a higher low (HL), but the oscillator is making a lower low (LL), this is considered hidden bullish divergence. If price is making a lower high (LH), but the oscillator is making a higher high (HH), then you have hidden bearish divergence. In a market that trends in a particular overall direction, the main trend is typically punctuated by periods where the market goes in the opposite direction of the main trend (forgive me if this is stating the obvious). ‘Retracement’ is when the market goes in the opposite direction to that of the main trend, and ‘trend continuation’ is a return to that main trend following a retracement.
Jeff, I am not sure how it is all relevant to trend following!
“Fair enough! Incidentally, do you think this difficulty in translating into mathematical formulas what is obvious to the human eye might explain why hedge funds haven’t sacked their technical analysts and replaced them with computers? :)”
In my book I talk about predictive and reactive technical analysis. The later is trend following. The former is BS. Some, just like BS. 🙂
“I’ve just had a look at your book. Is the distinction that predictive TA looks at things like Fibonacci numbers and Elliott waves, whereas reactive TA is simply interested in jumping onto an existing trend and staying with it until it shows signs of coming to an end?”
I like my explanations better, but I think you get it.
“I read a book called Trading Chaos a while back, in which the authors talked about physics and the prevalence of fractals in nature. It was all very interesting, but I struggle to see the relevance of the properties of a snowflake to any market, either brick or virtual!”
There is no relevance! This conversation with a reader of mine reminded me of a recent article about the new owner of the Nets: Mikhail Prokhorov. Prokhorov has told the world that he avoids the internet:
“I don’t use a computer. We have too much information and it’s really impossible to filter it.”
Bill Simmons, in his article on ESPN, adds:
“You know what? He’s not necessarily wrong. Do we REALLY need all this information? Like, right now — you’re reading this column and hopefully enjoying it, but ultimately, could you have survived the weekend if you missed it? I say yes. Just about everything online fits that mold — you have to sift through loads of bad writing and irrelevant information to find the occasional entertaining/funny/interesting thing, and even then, it’s not something that’s making or breaking your week. Ever been on a vacation and had little-to-no Internet access that week? You survived, right? Maybe the big Russian is on to something.”
Exactly. Isn’t that paragraph a great explanation as to why purveyors of too much analysis…are [expletive]? Its a great endorsement of trend following.