Alchemy Divergence Indicators were developed in response to
a void left in the standard set of indicators provided with
Tradestation. The Alchemy Divergence Indicators provide an
alert and pop-up text when a divergent condition exists between
price and the selected indicator. You can select divergence
between price and RSI, MACD, Stochastics or Tick. You may
select any one indicator or a combination of any of the four
Unlike the standard set of TradeStation divergence indicators,
the Trading Alchemy Divergence Indicators do not wait for
a pivot to occur in price action before indicating a divergent
condition. This means that with the Alchemy Divergence Indicator
you will receive a divergence indication much quicker than
the standard TradeStation divergence indicator. This allows
you to get a step on making top or bottom formation decisions
and allows you to enter your trading orders much sooner.
occurs when the indicator ( RSI, MACD, Stochastics or Tick)
is giving you an indication as to direction that is different
from the direction that price is moving. For example, price
is heading higher and the indicator is heading lower. Divergence
occurs when the higher price is not confirmed by a higher
Divergence - occurs when price is making a lower low and
the indicator is making a higher low, failing to move to a
new low with price. This is a great sign of a potential bottom
and many traders look deeper for confirmation of a buy signal
when bullish divergence occurs. Often times, you will see
bullish divergence correspond with the low of the day.
Divergence – occurs when price is making a higher high
and the indicator is making a lower high, failing to move
to a new high with price. This is a great sign of a potential
top and many traders look deeper for confirmation of a sell
signal when bearish divergence occurs. Often times, you will
see bearish divergence correspond with the high of the day.
and bearish divergence is a great tool for the intra-day trader.
However, spotting actual divergence with price and the indicator
can be a very tedious and inconsistent task for most traders.
With the Alchemy Divergence Indicators all the difficult and
tedious measuring are done for you in a very visual and consistent
manner. This allows the trader to concentrate on possible
trade set-ups and trade confirmation signals.
Detailed Explanation of the Indicators Used for Alchemy Divergence:
Channel Index – CCI The Commodity Channel Index (CCI),
which is best used with contracts that display cyclical or
seasonal characteristics, is formulated to detect the beginning
and ending of these cycles by incorporating a moving average
together with a divisor, which reflects both possible and
actual trading ranges. The final index measures the deviation
from normal, which indicates major changes in market trend.
Many traders use the CCI as an overbought/oversold indicator
with 100 or greater indicating that the market is overbought,
and -100 or less that the market is oversold.
Alchemy CCI Divergence Indicator is designed to display divergence
in these overbought and oversold zones. The Alchemy CCI Divergence
Indicator is used for counter trend trades. It displays bullish
divergence when price makes a lower low while the CCI makes
a higher low and it displays bearish divergence when price
makes a higher high while the CCI makes a lower high. These
CCI divergences can be used in conjunction with CCI overbought/oversold
line crosses and CCI trendline breaks for entries.
Strength Index – RSI
RSI is a momentum indicator which measures price relative
to itself. It is relative to its past performance and is front
weighted. Therefore, it gives an excellent velocity reading
in comparison to other indicators. The RSI is less affected
by sharp rises or drops in price performance. Thus, it filters
out some of the "noise" in an instruments trading activity.
RSI tends to treat price as a rubber band. The rubber band
can be stretched just so far. After a certain point the rubber
band is forced to contract. The RSI is a momentum indicator
which usually turns ahead of price and lends itself well to
trendlines, support and resistance levels and divergence.
of the most important aspects of the RSI is to look for divergence
between price action and RSI readings. Upwardly sloping price
and downward sloping RSI should be taken as a warning that
price is about to break down. The reverse is true for downward
sloping price and upward sloping RSI. This usually indicates
that price is about to break out of a decline.
Stochastics oscillator compares where price has closed relative
to its price range over a specifically identified period of
time. The theory is that in an upwardly trending market, prices
tend to close near their high; and during a downward trending
market, prices tend to close near their low. Further, as an
upward trend matures, price tends to close further away from
it’s high; and as a downward trend matures, price tends to
close away from it’s low.
Stochastics indicator attempts to determine when price starts
to cluster around it’s low for an uptrending market and around
it’s high in a downtrending market. These are the conditions
which indicate a possible trend reversal is about to occur.
Stochastics indicator is plotted as two lines. They are the
%D line and the %K line. The % D line is more important than
the %K line. The Stochastic is plotted on a chart with values
ranging from 0 to 100. Readings above 80 are considered strong
and indicate that price is closing near it's high. Readings
below 20 are considered strong and indicate that price is
closing near it’s low.
the %K line will change direction before the %D line. However,
when the %D line changes direction prior to the %K line, a
slow and steady reversal is usually indicated. When both lines
change direction, and the faster %K line subsequently changes
direction to retest a crossing of the %D line, but does not
cross it, this is a good confirmation of the stability of
the prior reversal in price. Many times when the %K or %D
lines begin to flatten out, this is an indication that the
trend will reverse during the next trading range.
often, divergence sets up on the Stochastics chart. That is,
price may be making higher highs, but the Stochastic oscillator
is making lower lows. Or conversely, price may be making lower
highs, and the Stochastic oscillator is making higher highs.
In either case, the indicator usually is demonstrating a change
in price before price itself begins to change trend. In addition,
the Alchemy Stochastics Divergence Indicator uses a proprietary
Trading Alchemy formula which was specifically designed for
detecting divergence. Using standard stochastics for spotting
divergence can lead to many false signals and trading frustration.
The Alchemy Stochastics Divergence Indicator was designed
to filter out many of the false signals allowing the trader
to use the signals with much more confidence.
Average Convergence Divergence (MACD)
MACD is an oscillator which is derived by dividing one moving
average by another. The
moving averages are usually exponentially weighted, thus giving
more weight to the most recent price action. MACD is plotted
on a chart with a horizontal equilibrium line. The equilibrium
line is important. When the two moving averages cross below
the equilibrium line, it means that the shorter exponential
moving average (EMA) is at a value less than the longer EMA.
This would be a bearish signal. When the EMA’s are above the
equilibrium line, it means that the shorter EMA has a value
greater than the longer EMA. This is a bullish signal.
Moving Average Convergence Divergence indicator name is derived
from the fact that the shorter EMA is continually converging
toward and diverging away from the longer EMA. MACD’s can
be used for an infinite number of time periods. Divergence
can occur using the MACD indicator and many traders use the
MACD to detect divergence.
TICK, also known as the NYSE cumulative tick index, is a measure
of the number of NYSE stocks that at any moment are trading
on an up tick if positive or on a down tick if negative. Although
the TICK is without question a lagging indicator, it is still
helpful to the trader in many ways. First, if you are currently
in an established position in the market, the TICK is an excellent
confirmation as to whether or not you have the right side
of the market. For example, if you are long the market with
a position, it is very helpful to watch the TICK to see if
it is improving from a lower-level and trending up to a higher
level. That will confirm that the cash market is indeed moving
along with the futures which will give you greater confidence
to maintain your position.
the TICK reaches extreme levels it is a good indication that
the trend may be close to running out of steam. Of course,
extreme levels vary. The TICK can also be used by traders
to assist in confirming reversal chart formations. If the
TICK is at an extreme level and then begins to reverse and
head in the opposite direction, this could be a great confirmation,
along with other chart patterns, that a reversal is occurring.
TICK can also be used as an excellent divergence indicator
and will assist the trader in identifying major turning points
in the day.