Abstract: The chaos operation method provides investors with three reliable trading signals. This article will introduce the first trading signal (trend turning) – bullish/bearish divergence.
Chaos operation method – the first trading signal
With the continuous progress of investors and the market, if they want to succeed in today’s market, traders must learn not to stick to the rules and learn to adjust their investment strategies according to different market characteristics. This means that traders should not forego profits between trend confirmations from trend reversal points. At the same time, you should learn to flexibly go short or long against the trend.
In short, traders should learn to operate flexibly and accurately find the reversal point of the trend, and the bullish/bearish divergence bar is the best tool to predict the reversal. The author reminds that as the first trading signal of the chaotic operation method-the bullish/bearish divergence column, if used in conjunction with the alligator line, it will effectively increase the success rate of the transaction.
For the usage of crocodile line, please refer to:Chaos operation method (5) technical analysis – the alligator line (the alligator))
Bullish/bearish divergence bars
With the popularity of programmatic trading, many behavioral characteristics of traditional financial markets have been changed, which has also changed the way important trends in the market peak/bottom and build tops and bottoms.
In the past, bull markets ended when the bulls were all in and there was no new buying. And now, the reason for the market reversal may also be the aggressive buying/selling order to intervene, thereby reversing the market trend. And the best tool to detect market trend reversal as early as possible is the bullish/bearish divergence bar away from the Alligator line.
A bullish divergence bar has a lower low while closing in the upper half of the current bar; a bearish divergence bar does the opposite, making a new high while closing in the lower half of the current bar.
Bullish/bearish divergence bar example:
In short, there are only two points to distinguish the deviation column: 1, new high or new low; 2, the closing price returns to the middle and upper part of the entire K line (including the upper shadow line). The deviation column is very intuitive and easy to identify,However, it should be noted that when used with the crocodile line, the diverging column cannot appear within the 3rd line of the crocodile, and the existing price should be far away from the crocodile line.
The angle between the Alligator line and the price
In order to increase the effectiveness of the bullish/bearish divergence bars, the chaos operation method introduces the angle between the alligator line and the price as a reference standard. Simply put, the steeper the angle between the blue line of the Alligator line and the actual price, the greater its momentum to reverse the current price movement.
As shown in the figure, as the price continues to rise, the three lines of the alligator also continue to move up, and when the price appears a bearish divergence column after the continuous rise, we find that the divergence column is far away from the three lines of the alligator. At the same time, there is an obvious angle between the price and the blue color of the alligator line, and the bearish divergence bar becomes an important signal for investors to predict the trend reversal in advance, and then the price falls sharply.
Regarding the measurement of the included angle, we should follow four important judgment rules:
Start from the intersection of the price bar and the three Alligator lines;
Draw a straight line along the direction of movement of the Alligator line, using the blue line has a higher importance;
Draw a straight line along the direction of the price movement;
If the two straight lines diverge significantly, the trader can determine the presence of an angle;
Investors please remember that only when two straight lines diverge,Signals of bullish/bearish divergence bars are worth paying attention to.
The author reminds again that the bullish/bearish divergence column cannot appear within the third line, and at the same time, the farther away from the position where the signal appears and the price trend, the better, and the steeper the included angle, the better.
If you have clarified the rules, you can enter the market (partial entry) when the bullish/bearish divergence bar appears. If there is a bullish divergence column, traders should place a buy order at a position slightly higher than the top of the current K-line; if a bearish divergence column appears, traders should place a short order at a position slightly lower than the bottom of the K-line.
A bearish divergence column appears, and a short order is placed at a position slightly lower than the bottom of the K line:
Once a pending order is triggered, traders should immediately set a protective stop loss. As in the case above, the initial stop loss should be set above the high of the bearish divergence bar (below the low of the bullish divergence bar).
As the author said before, some investors may wonder, isn’t it wrong to trade against the trend? The answer is very obvious. First of all, we must eliminate “bias”. Although the success rate of contrarian operations will be reduced, the stop loss is small and the profit margin is large. If there is a clear reversal of the trend, the profit will be relatively objective. Secondly, the bullish/bearish divergence column is only the first of the three trading signals of the chaotic operation method, and the appropriate opening ratio when the first signal appears will be given in subsequent articles.(Billywritten)
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