How to use divergence signal in a trading strategy

Choosing a trading system is quite a long process, through which every trader has to go at some point. The difficulty is in finding signals, as well as following them. If you create your own system, trading process will become much is easier as no one knows their product better than the author.

Trading strategies may be based on several signal from different indicators or patterns on the FIX API Forex market. The combination and complementarity of these signals shape the trading system. Most traders use different methods to forecast the entry points, one of which is the divergence signal, which we’ll look at in more detail here.

Divergence is the difference between currency pair quotations and the value of a technical indicator. There are two types of divergence: bearish and bullish, which indicate a downward correction wave and an upward wave, respectively. In fact, divergence indicates a reversal of the price relative to the established movement. This signal will be of use for everyone who uses the trend and counter-trend based trading strategies.

As we have already determined, divergence appears when the price shows an inverse correlation with the indicator. But which indicator exactly? In fact, a set of several simple indicators in FIX API MT4 is perfect to determine divergence: the Awesome Oscillator, MACD, Stochastic, and RSI.

So, let’s take a look at an example of how to combine this signal with a simple trading strategy. For example, consider Bill Williams’ system, as his trading algorithm includes Awesome Oscillator indicator, on the basis of which we will define divergence.

Quotations of the EUR/GBP currency pair are in an uptrend. Williams trading system confirms this movement with ascending lines of the Alligator technical indicator and fractal zone. We see that each new “high” on the chart is above the previous one, which is also a sign of uptrend. Now you want to compare, if there is a difference at these points with the Awesome Oscillator technical indicator. As you can see, every “high” in the quote window coincides with the AO descending value. That is, there is a situation where price increases, while AO falls. This is the situation of discrepancy, or divergence. Also, according to Williams’ system, the quotes strayed from the Alligator lines to form the “first wiseman” signal for sale by this strategy. Thus a FIX API trader gets two signals for sale.

As you can see, this movement is against the trend. Loss limitation will be set above the second “high”, and the take profit can be set in a range between 61.8% and 76.4% of Fibo grid. Thus, the ratio of SL and TP will be 1 to 4, which is an excellent result and increases the mathematical expectation of the trading strategy.

The benefits of introducing divergence signal in the trading system:

  1. An additional signal to search for correction zones that can be supported by other technical signals;
  2. Increase of the number of filters to open a deal at a FIX API Forex broker;
  3. Better risk management (divergence-based trading will always have a short Stop Loss level and a long Take Profit);
  4. A wide range of indicators to find divergence signal;
  5. Ability to work both in the trend direction and against it.

Let’s take a look at a practical example of how to apply signal divergence to a trading system. I am quite sure that this signal is easy to fit in any trading strategy and will be an additional tool for effective analysis and forecasting the future price movement. Moreover, this signal is easy to use and can be automated using a trading algorithm.

 

 

FOREX ROBOTS FOR FIX API TRADING

I have previously covered the topic of forex robots and their nature. Let me remind you a few key points of forex robots. First, the appearance of robots allowed for faster trading and thus for the forex market growth. They also let traders have more time and resources to analyze the market and make decisions. Robots created new types of trading that were not possible before – like scalping or arbitrage trading. In a word, forex robots are extremely important tools for any trader.

However, most of the forex robots, free or paid have been designed and built on standard algorithms and so are limited in their functionality. What makes a robot successful? Mostly, it is the speed of the operations performed. In this case, we understand, that a robot should in fact monitor the current market situation and analyze it live.It means it must have an actual live access to the market.

So, FIX protocol came to rescue. FIX is a financial protocol that lets your software access actual market data.

The core of FIX protocol is the instantaneous data exchange. For us, traders, it is crucial to know the cost/price of an asset and the faster we know it the faster our forex robot analyzes and reacts.

The problem here is that most of the software (forex robots) are built to perform trades on brokers’ serversand not via FIX protocol. Such robots can be under pressure from the broker’s side – increased slippage, delayed order time, etc.

The advantages of a FIX protocol are clear:

  1. Trades with no spreads and slippage
  2. Orders are not delayed
  3. Complex asset analysis is available
  4. Opportunity for effective Arbitrage trading (FIX API Latency Arbitrage, FIX API 2-LEG Latency Arbitrage)

The major thing about a forex robot working through FIX API protocol is that it takes its data directly from the quote or liquidity provider avoiding broker server delays. Software wise the difference between FIX API forex robot and a normal one is minimal but the results of trading are astonishing. Surely your forex robot must have FIX API through your broker server to be able to work properly.

One of the most important things is to find a good FIX API forex robot. How do you do that? There are a few forex robot review sites and that would be your starting point. Analyze the reviews, pay attention to a software developer – who it is, what products have been created before, if there is any trading experience behind the algorithms, what kind of support is provided after the purchase. All these things are important.

It goes without saying that a product you are considering to buy or get free should have positive reviews and its performance data available. Some of the useful information can be found at different forex social network sites where you can register and follow successful traders. Some of the developers offer free webinars to get you acquainted with the product or/and peculiarities of FIX API trading, Latency Arbitrage trading, etc. It will not do any harm to watch those webinars and get as much information as you can.

Divergence-based Forex robots

New trading tools appear all the time: new auxiliary indicators, modified old ones, cutting-edge algorithmic systems. These systems are essentially trading robots that are able to analyze assets and open buy/sell transactions. Simply put, a piece of code is written which, based on software iterations, reads the values from the chart.

As known, each indicator or technical figure can be detected and recognized by a robot. Indeed, in their essence, all the indicators that appear in the MT4 fix api terminal are also software code that displays the value based on the quotations. Take, for example, the simple moving average. This indicator represents the average price value during the last n bars. That is, if a trader sets n=50, the program calculates the average over 50 candles and will give the result in a line form. Trading robot is able to perform this calculation, compare prices with the MA level and based on that decide on a long or short position.

This example of MA is the easiest working principle for a robot. Today I’d suggest to consider, how does a divergence signal based robot work.

So, divergence is the difference between the currency pair quotations on the FIX API Forex market with the values of the indicator. In order to understand what it is and how it works, let’s look at an example of divergence on the basis of a MACD indicator.

The MACD technical indicator is represented with two lines (the MACD line and the signal line), as well as histograms (which show the difference between the two lines). To detect the technical divergence signal, a histogram is required. Since we already know that divergence is the difference between the price and the indicator, we need to spot this difference.

The graph clearly shows that the moment when the currency pair quotations showed growth, MACD histograms declined. We see that peaks of quotations grow, and histograms peaks are falling. This is the signal for the correction movement, which did actually happen afterwards. This kind of divergence suggests opening short positions after the second discrepancy.

In turn, the trading robot analyzes both the MACD value and the value of quotations, and, based on its program code, opens a deal after it “sees”, that is, detects, a divergence.

The main advantages of a divergence-based trading robot:

  1. Speed: the robot is able to detect the presence of divergence in a fraction of a second and then perform a trading operation;
  2. Monitoring of the whole market: A FIX API trader is just not able to simultaneously review all assets, and often the signal simply goes unnoticed;
  3. Continuous trading: the key advantage of any robot, not only of one based on divergence, is the 24/5 operation. Trading via FIX API broker, the robot will constantly analyze the market in search of divergence while it is open;
  4. Short stop loss level relative to the take profit level Loss limitation will always be set behind the peak, and the level of profit has to be 4-5 times longer, which is a good indicator and increases the mathematical expectation of the trading robot.

It is worth mentioning that a divergence-based trading robot can determine it not only by MACD indicator, but also by some others: Awesome Oscillator, RSI, MA etc. Also within the parameters of the robot, you can set it for trading after two as well as three divergencies (3 maximum quote peaks and 3 consecutive indicator drops), which makes the signal more robust.

Divergence-based trading robot is a full-functional tool for FIX API trading. It is an irreplaceable assistant for a trader, as well as a means for performing automatic transactions.

 

 

 

YOUR TRADING STRATEGY IS YOUR PERSONALITY

It might sound strange to you but my personal forex experience proves this headline. Despite the myriad of technological software developed and built for the last 15 years, forex is still the market of personalities. And having analyzed trader’s choice of tools it is possible to understand the basics of trader’s personality.

People arrive to forex with wealthy-over-night ads in their minds and images of the ocean front villa and the laptop next to the pool. Most of these images fade very quickly and most of such people lose and go home. Forex is a strange place but once you decided to jump in look at it as a place where there is no magic happens and hard work awaits you.

Choosing a trading strategy is a tricky thing. New comers usually make on and the same mistake – they are trying to find the Holy Grail and the best and the most money-making strategy ever.

However, learning is the key to success. Let’s have a look at ideal trader and what would he/she do in the ideal world:

  1. Lots of learning. An ideal trader would start learning how forex market is built, who is who and what the relationships are between a trader a broker a liquidity provider, etc.
  2. A trader would analyze and review different strategies and approaches to successful trading. That requires a lot of homework. Reading forex robot review sites, analyzing different software developers and their performance as well their products.
  3. Only then an ideal trader would pick up several software items and play with them before entering a real-life world of trading.

Having completed these three steps a trader will increase his/her chances of not losing funds on day 1.

I would like to say a few more words about choosing the trading strategy and building your own trading system.

A trading system is nothing but a set of rules and principles of market data analysis and trading. The core of the system is your software or a set of algorithms that is carefully crafted to carry out your trading according to your set up.

I believe that successful trading is only possible when you have created your trading system. You’ll know exactly what kind of signals the trading system generates, at which phase or stagethe market currently is, what asset you should buy or sell, what amount of funds should be invested into a deal, etc.

Eventually, after a long search of different paid and free trading systems, (they are also called forex robots) each trader will arrive at his choice of strategy and the software. Believe me it won’t have to be your own algorithm, indicator or math model, you can pretty much do well with the existing and tested software products.

I believe a successful forex software is likely to be developed by a company with extensive market experience and trading experience, so pay attention to a developer of the product in question. Check how many products have been released, read the reviews on special forex robot review sites, talk to other traders in the social networks and get an understanding who the developer is. The other key thing is a post-purchase support – a good developer will help you set the software up and avoid unnecessary hassle.

I see three major points in creating a trading system:

  1. The chosen strategy of the trading system
  2. The accepted tactics of the trading system
  3. The management of funds

A global vision of your trading defines your strategy. If you see the forces behind the market and recognize signals that will be shaping the market in the nearest future, you can build a great strategy.

Tactics is your response to what you recognize in the market. So here you need to employ your chosen software and interact with your trading signals. And that is a point where your personality kicks in. How many filters do you prefer prior to decision? What methods do you employ to analyze the market? Do you stick to one currency pair or the whole list? These are the questions you will need to answer as a trader.

My favourite trading strategy is Arbitrage and it took me a few years to arrive to a successful Arbitrage trading. I was building and re-building my strategy along with the market development. For example, when brokers spotted my Latency Arbitrage trading and delayed my orders and/or increased slippage I had to adjust and improve. I mastered a 2-LEG Arbitrage trading where brokers can’t identify that it is an Arbitrage trading in fact. Lately, I came across of a very interesting concept called Lock Arbitrage that allowed me to make another step forward in finding my successful trading strategy.

TRADER AND BROKER: ARE THEY REALLY FRIENDS?

That’s a great question for a long discussion. I have decided to demonstrate the relations between a broker and a trader through a very interesting tool – High Frequency Trading – Latency Arbitrage and 2-leg Latency Arbitrage.

Let’s start by understanding what Arbitrage is all about. It is a forex trading strategy based on spotting fast and slow brokerage and taking advantage of it. In simple words – a trader is using a forex robot software that finds a difference in quotes for the same asset on a faster and a slower broker and does the trade netting the tiny positive result. With the huge number of trades (and that is why it is called High Frequency Trading), the robot is scoring decent profits. So, it looks like a football game between a trader and a broker. To get things going both parties invest into a lot of training J to win. Both invest into more and more sophisticated software but brokers do have advantage over traders. They have more money, they control their broker servers and they have access to more information than traders.

Theoretically, brokers are interested in traders, more traders – more trades and more profit for brokers. That’s easy to understand. The question is whether a broker is interested in a losing trader or a winning trader.

Traders have employed Latency Arbitrage and HFT strategy to make money on very small quotes differences between different brokers. How did brokers fight back?

Well, some have introduced a policy on their sites that trades with minimal time are not allowed, some brokers purposefully delayed order time and increased slippage. Generally, a broker has a million tricks to get a trader to lose. The traders, however, answered with a 2-leg arbitrage that is a lot harder to spot for a broker to understand that Arbitrage trading is going on.

How does it work? 2-leg arbitrage is when a trader gets an asset from one broker and sells it immediately with the second broker. This type of trading is harder to identify as an arbitrage trading.

So, if you are a trader and your key strategy is HFT then you need to arm yourself with a quality 2-LEG Arbitrage software. Choosing one is a serious job. The good start would be to view forex robot review sites and read about different software developers. Usually the best software comes from a company experienced enough in trading and working with brokers. The key point in successful trading is to know how brokers operate, how they think and where they are ready to catch you. There always be fast and slow brokers due to a million of different reasons and smart traders must use this situation to score profits. However, it can be properly done only with the help of a very good software and one more trick. Most of the software will require VPS (virtual private server) installation, so always keep your VPS in the same data center as you broker server. This will allow you for a speedy trading.

 

 

Latency Arbitrage vs 2 Leg Arbitrage

HFT trading induced a lot of techniques and algorithms for financial asset trade. The strategies which previously required to spend a lot of time and effort on, are now run in a matter of milliseconds. And all this thanks to the automated trading robots.

As with every software, trading robots were continuously improved, updated and optimized. In turn, the number of their specifications only increased. Impulse development of this sphere also provoked additional conditions for trade, thus creating the FIX API Protocol. The essence of this protocol is that financial information, quotations included, can be acquired much faster. Furthermore, regular traders can get access tothisprotocolviatheFIX APIbroker.

As this protocol provides access to more quickly received quotations which makes a trade advantage, it brought arbitration transactions to the world.

But in turn the arbitration trade also divided into two types:

  • FIX API Latency Arbitrage
  • FIX API 2-Legs Arbitrage

Today I will make a small FIX API tutorial in which we go over every type of algorithmic arbitration strategy.

FIXAPILatencyArbitrage is a strategy which transactions are based on brokerage “latencies”.

FIXAPI2-LegsArbitrage is the simultaneous opening of different (sell/buy) orders for the same financial asset, but on different sites, at the moment when there is a difference between prices for this asset.

The basic principles of these strategies

FIXAPILatencyArbitrage conducts the analysis and monitoring of currency pairs values and finds the deviations in them. Then, the robot makes the decision of buying the cheaper asset. The bottom line is to identify a “quick” broker. That one quotations vendor who ensures their timely updates, and also has a real picture of the market. In addition, you need to identify a “slow” broker to whom quotes come slower. The account is to be opened and trade is to be done at the second broker.

For example: the price of the currency pair EURGBP at the quick broker is 1.22343, while at the slower one it is 1.22333. The difference in 5 pips is the yield for the algorithm. The robot, according to the strategy of FIXAPILatencyArbitrage, buys the currency pair at the second broker and will record the result by the “fast” broker price at the time of opening.

2-LegsArbitrage, as well as LatencyArbitrage analyzes the same asset and compares for the presence of deviations. Note! In this strategy, you do not have to define which broker is “slower” because the trading is conducted simultaneously at two sites. The robot analyzes the asset, compares prices and in case of difference, opens up a deal to buy at the broker where the quotes are lower. Respectively, it sells where the quotes are higher.

For example: the cost of EURGBP at one broker is 1.23455, and 1.23450 at the second one. Trading robot that works with the FIX API 2-Legs Arbitrage strategy will open the transaction for the sale at the first broker, and will purchase from the second. These 5 pips will become the potential income of the trader.

What are the advantages and disadvantages of FIX API arbitrage strategies

In order to determine which one is better, it is enough to look at the weaknesses of each of the options. LatencyArbitrage is very easy to be tracked by the brokerage companies which also have robots to search for this kind of trade. That is because the transactions span less than one second and are commited in large amounts. Thus, the broker may affect trade through an additional spread or delay. On the contrary, 2-LegsArbitrage trade is difficult to track. Indeed, in any case, the trader will have a minimum yield (5 pips in our example), that allows to hold the positions from several seconds up to several minutes. This type of operations is impossible to track. In addition, the second part of the deal is traded at a whole other broker, which makes the tracking process even more complicated. Also, a key shortcoming of the LatencyArbitrage strategies, and at the same time an advantage of 2-LegsArbitrage, isinfindingthe “slower” brokerwhichentailsconstantmonitoringoftradespecificationsofbrokeragefirms. For the FIX API 2-Legs Arbitrage it doesn’t make a difference.

To sum up, I would like to emphasize that for the successful work, a FIX API forex broker is needed, which will provide the opportunity to trade on market quotations. It is also worth mentioning that each of these strategies is profitable, and this is essentially the main factor. Yet more simple to use, as well as less defect-prone, is the 2-LegsArbitrage strategy.

HIGH FREQUENCY TRADING

Over the last years the world is gaining speed in almost every aspect of its life. Humans are automating everything they can to get things done faster, achieve more and work less. Or it is probably just seems so. In reality, we work harder because we need to constantly learn and adjust to a changing techno environment.

The forex market is among the leading industries to employ tech and thrive on this. Let’s take high frequency trading. A pure and straight forward example of achieving new horizons with the technology employed. What’s HFT? It is a high frequency trading method that allows to open/close trades at a super high speed, in other words it buys and sells forex instruments very fast. These operations are only possible because of forex robots. I have already covered the topic of a robot and how to choose a forex robot. See the details here: http://forexrobotsreview.us/2017/02/16/forex-robots-should-you-invest-into-a-forex-robot/

FIX API trader can trade directly at the interbank level avoiding the unnecessary delays from broker servers and very often gain on the absence of such delay. I mean here that technology is constantly developing to give the market sufficient weapon to lose les and win more.

The trading is carried out by forex robots that are able to analyze the data super-fast and make a decision whether to open a short or a long position therefore creating advantage with fixing the position at a FIX API protocol that is widely used by forex market.

What is the principle of an HFT?

The market volatility is always increased at certain points – stock exchange opening, expected news releases, monetary policies change of Central Bank, etc. These are key moments for high frequency trading. Due to a bigger spread, volatility of quotes and arbitrage situations the forex robots fix micro results on a huge number of trades creating positive outcome.

Let’s have a look what kind of high frequency trading can a trader employ.

Wikipedia outlines 4 basic types of HFT but I believe the best one for a trader would be Arbitrage trading.

Arbitrage trading – a strategy based on a difference in quotes that appears due to a certain time or speed lapse for a particular asset. This type of trading can be either FIX API Latency Arbitrage or FIX API 2-LEG ARBITRAGE. What’s the difference between these two? In the first case, a robot finds a difference for the same asset between two different brokers and opens a position with a slower broker, thus – Latency Arbitrage. In the second case a forex robot buys an asset from broker 1 and sells it with broker 2. Because the speed of a trade is measured in milliseconds, a robot can open and close many trades within a very short period and can fix positive results.

A good example would be buying and selling shares on stock exchange. Say a share is USD100 and the derivate on the share is USD100.01. A forex robot can buy and sell this within seconds and make this 1 cent on a share. But what if it is 1000 shares with hundreds of trades per day.

Latency Arbitrage is a very interesting tool and in my next article I would like to talk about how to choose the right Latency Arbitrage software.

FOREX ROBOTS: SHOULD YOU INVEST INTO A FOREX ROBOT?

There never is going to be a straightforward answer to this question. Some people will say that there is no point to spend money on technology when you can easily find a free forex robot and set it up for your trading needs. Others would argue that nothing really good comes for free so the more you invest into the software the more prepared you are. Personally, I believe both are equally right. However, for me the second approach works better. Let’s have a look at what forex robots are, how you choose the right one and should it be free or paid.

What is a forex robot?

Forex robot is a software programmed using sophisticated mathematical algorithms that cover all your trading needs. With the help of a robot you can achieve much better results than with your bare hands on the keyboard. A good example would be a scalping robot: a trader can’t physically perform 100+ openings/closings per hour whereas a robot can. Why is it called scalping? Because it fixes minimal positive results and makes a tiny profit on a large number of trades in a very short timeframe. Shaving off, so to say.

Modern day trading is impossible without a proper software. So, a trader needs a forex robot. The question is how to find the right one. Pay attention to the last sentence – the right one, not the best one. Why? Because a robot can actually adjust to your trading strategy and in a way to your personality. The task is to find the right one for you. I would start by carefully analyzing forex robot reviews sites, get acquainted with the types of robots on the market, their functionality, performances, strategies employed and algorithms used.

From my personal experience I deducted that testing and reviewing a forex robot is crucial because it all depends on how the software had been built and who’d built it. It is not enough to be able to code and know mathematics and algorithms. The best forex robots around are those created by the synergy of traders and programmers. So, when choosing one, get an understanding who created it, whether there was any trading experience behind the algorithms. The most successful robots are the fruits grown from experience of a manual trading converted into algorithms.

How to choose forex robot?

The other important issue in choosing a robot would be to look at how much statistical data is available on free resources or social forex sites of a certain robot. The producers, once they are sure of the quality of their product, would be publishing its results and stats everywhere to get traders’ attention. This kind of a robot can be trusted to perform well.

Finally, let’s talk about free and paid robots because there is an issue of investing or not investing into a software. Custom made and algorithmically well-built robots would cost you some money and provided you have done your homework and understand how the particular robot works, you do have good chances of building a winning trading pattern. I can’t say this is impossible with a free robot. However, there will be certain limitations. Try both and see what works for you. Trading is a serious thing and the more prepared you are the better. I prefer investing into software and learning from it rather than losing my deposits.

More on the topic here:

https://en.wikipedia.org/wiki/Automated_trading_system