After years of research and the development of many different divergence detection algorithms, we discovered that the biggest problem was the synchronization of the peaks in the oscillator with the peaks in price. Every oscillator either leads or lags price. This means the peaks in the oscillator do not coincide with the peaks in price. The consequences vary from mild to severe distortion. There is only one way to avoid this problem and that is to find an oscillator that exactly synchronizes with price. There is only one oscillator that does this and it is a special form of momentum and it can only be done if the length of momentum is modified to fit the distance between the peaks in price. That means you need a utility that automatically adjusts the momentum length based on the separation of the price peaks. That is exactly what this software does.
How the Tool Works
It is important to understand what this tool does and why it works. We will deal with the bearish divergence theory. The bullish example is similar but in reverse. The theory of divergence is to look for a place where the price has pushed to a peak (A) and then fell back to a low point (B) and then rose above the high set at peak A. At this point the tool looks for the price to drop and identifies the high of the prior bar as peak C. Only a one bar drop in price is needed to trigger the divergence detection. The tool then looks back and finds the bars on which peak A and peak B formed such that the distance between peak B and peak C meet the minimum percentage move required by the inputs. Next the tool counts the bars between peak B and peak C and measures the distance moved from the low at B to the high at C. To confirm that divergence occurred, the distance moved on the way up to peak A must be greater than the distance moved from B to C over the same number of bars as the B to C move took. Say that the B to C distance moved was 7 in 5 bars and the high at A was 1500. The tool looks at the 5 bars preceding A to see if there was a low below the 1493 (1500-7). It there was, divergence is confirmed. What that means is that the price move between B to C was weaker than the same length move on the way up to A. This weakness often precedes price declines and can be used to locate short trades.