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Divergences in indicators can indicate shaky trades

I thought I would talk a bit about trade entry today and how divergent indications on some of the oscillators I use indicates the need for caution.  Emini trading is a process of choosing the highest percentage trades, and conversely, avoiding the lowest percentage trades.   The ultimate goal of any trading system is to maximize the binary result of any trade, and I think that is an important point to remember.  Trading is really just a matter of entering when your chances are best for a strong trade.

Since this is basically a percentage play, you still may not always end up with satisfactory results.  Look at the first potential trade of the day on Fridays chart.  The stochastic indicator showed a strong sell, but the CCI was still wandering about in the overbought territory.  I declined to take that trade.  Several bars later the CCI plunged south, in agreement with the earlier stochastic indication, but I worried that perhaps I missed the main move in that trade and avoided any entry.  Unfortunately it would have been a good trade, but the early divergence made me very wary of the trade.   I don’t enjoy missing trades, but I would much rather err on the side of conservatism than jump into trades where I am not comfortable with the outcome.  Additionally, the DecisionBar program was neutral on entering the trade at that point, so my mind was made up.

Was it a bad move?  No, not really.  As I said earlier in this post, trading is a percentage play and I didn’t feel the probability favored a strong trade.  Some have tried to compare this percentage strategy with poker, but that would be wrong.  A deck of card contains a finite set of variables, that is, the number of cards in the deck.  But trading has an infinite set of variables, so it differs greatly from straight gambling.   Additionally, markets tend to trend, where the shuffling and dealing of cards is truly random.

So I missed a good trade from the onset of the day, and the middle of the day was uneventful as the price action stayed almost precisely on the pivot point of the day.  Two later trades in the day were profitable, and both the stochastic and CCI entry indicators were in agreement.

Indicator divergences are always signs of potential trouble and I am careful when trading to make sure I avoid trades where I am getting conflicting information from the chart I am reading.  Hope that helps.