Using Volume Weighted Directional Bias As a Divergence Indicator
Here we see an excellent example of how divergence on the volume weighted directional bias (VWDB) indicator warns of a shift in market direction. If you're not familiar with natural gas futures, this market has been making some BIG moves lately. Here we are looking at the 30 MIN chart on the Henry hub natural gas futures front-month contract.
Notice on the chart that while the market continues marking new highs on 10/27/21, the VWDB has already peaked and is now marking lower highs. If you are long, this is a warning to take profits.
As far as using this signal for a short entry, it's important to understand that this divergence can sometimes build for considerable time before price finally rolls over and trends in the same direction as the VWDB indicator. Therefore, it is advisable to wait for additional market structure to lean on before entry: such as a previous level of resistance, or a fib extension perhaps if price action has rallied into uncharted territory.
Even if you had waited for the market to mark a lower high before entering a short trade (notice the lower high also completes a head and shoulders pattern), you still could have made $2-3k shorting a single NG contract on 10/28/21.
The longer a trend goes on, the more particapants have piled into positions in the direction of that trend. When the buying momentum runs out and the auction process reverts downward, all the late buyers begin bailing from their losing positions while those in profit take profits. Because everyone was long, they all become sellers. This is why so much countless time and effort has been put into all sorts of indicators and strategies to spot potential reversals before they happen.
This is just one more tool you can put in your toolbox to allow you to trade with conviction.
Trade well everyone.
Notice on the chart that while the market continues marking new highs on 10/27/21, the VWDB has already peaked and is now marking lower highs. If you are long, this is a warning to take profits.
As far as using this signal for a short entry, it's important to understand that this divergence can sometimes build for considerable time before price finally rolls over and trends in the same direction as the VWDB indicator. Therefore, it is advisable to wait for additional market structure to lean on before entry: such as a previous level of resistance, or a fib extension perhaps if price action has rallied into uncharted territory.
Even if you had waited for the market to mark a lower high before entering a short trade (notice the lower high also completes a head and shoulders pattern), you still could have made $2-3k shorting a single NG contract on 10/28/21.
The longer a trend goes on, the more particapants have piled into positions in the direction of that trend. When the buying momentum runs out and the auction process reverts downward, all the late buyers begin bailing from their losing positions while those in profit take profits. Because everyone was long, they all become sellers. This is why so much countless time and effort has been put into all sorts of indicators and strategies to spot potential reversals before they happen.
This is just one more tool you can put in your toolbox to allow you to trade with conviction.
Trade well everyone.
Comment:
NOTE: I made a mistake looking back at this chart. The opening range wasn't established until the beginning of the next 30 min candle. This was actually a break of the head and shoulders pattern which should have triggered the trade.