Charting and Studies User Guide - CQG.com

Page 552
Trix Divergence (TrxDiv)
Philosophy
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. One of the main characteristics of the Triple Exponential is the
relative slowness in directional volatility in relationship to many other momentum indicators.
This means that divergence can take far longer to be evident and therefore the default setting
for the Lookback period is quadruple of what many of the other indicators default is. At that
moment the value of the study itself and the default value of the bar are recorded. Divergence
is qualified when they move in opposite directions on a certain number of consecutive
occasions. A positive divergence is revealed by a red line recording a value of one and a blue
line a negative signal. This highlights how the raw code is primarily of use as an exit tool to
existing trend following trades. However, the building of code within the formula tool box
enables traders to increase the accuracy of divergence qualification by focusing on the absolute
value of the Studies or |bar values and creating more exact threshold parameters.
For more information about Trading Time, go to http://www.cqg.com/AdditionalInfo/About-
CQG/Trading-Time.aspx.
Additional study information is here: http://www.cqg.com/Docs/Trading_Time.pdf.
Shaun has also created a helpful video about quantifying divergence. Please go to
http://www.cqg.com/Docs/HelpFlash.swf.
Third-Party Studies