Charting and Studies User Guide - CQG.com

Stochastic Divergence (StDiv)
Philosophy
Page 549
This study attempts to redefine divergence by allowing flexibility in the established mantras
associated with the subject. The traditional interpretation is that if price is going in one
direction and the momentum indicator in the opposite direction, divergence is occurring and
suggests that the trend is ending. The reality is of this basic theory is that all but the strongest
trends will diverge and often give false exit signals to trend following trades and false reversal
signals against the trend.
The increased flexibility derives from the ability to not only look for divergence on the indicator
itself, but replace this with a moving average of the indicator in or order to smooth out and
reduce the number of turning points. The traditional mantra looks at absolute highs and lows of
price to define divergence but this study enables the trader to select what price should be used
to qualify. This means if for example the relationship of the close instead of high and lows is
used, it reveals the ability to quantify divergence in sideways markets in order to produce and
early warning to a break out and new trend. This is referenced as divergence as a continuation.
This use of different momentum indicators and variables of them to create divergence enables
the trader to define how aggressive or conservative they wish there signals to be.
Interpretation
Each momentum indicator used for divergence has different characteristics and therefore
different trading opportunities. Slow Stochastic is a rather sensitive indicator in its original
default setting in that has a close correlation with the price action of the market itself,
especially in its relationship to the close to the high or low of the bar. The default settings
Charting and Studies User Guide