How to Trade Divergences on Tradingview

CME_MINI:MNQ1!   Micro E-mini Nasdaq-100 Index Futures
This is the opinion of Optimus Futures.

This week’s idea looks for mean reversion between two similar markets.

Divergences let us know when something occurs outside the norm or average. This can be on a single stock, or in this case, between two correlated markets.

This strategy is ideal for someone new to trading and looking to understand how markets move in relation to one another.

We start by looking for two prominent markets that have a high correlation.

As a reference, correlations define how well two assets move together.

• +1 means the two move perfectly in the same direction.
• -1 means the two move perfectly in opposite directions.
• 0 means the two move entirely independently of one another.

Idea: Fading Correlated Market Divergences

Many markets trade in tandem such as gold and silver futures or the U.S. dollar and Japanese Yen.

For this example, we’ll be looking at the CME Group Micro E-Mini S&P 500 and CME Group Micro E-Mini Nasdaq 100 futures.

The measured correlation between the two assets is around 0.84 (Correlation may change in the future) when you look back ~60 months.

So, we know that while the two may trade apart, most of the time, they move in the same direction.

In the 5-minute chart below, we find a divergence between the Micro E-Mini Nasdaq 100 & Micro E-Mini S&P 500 futures around 0500 EST.

While the Micro E-Mini Nasdaq futures move higher the Micro E-Mini S&P futures head downward.

Just before 0700 EST, Micro E-Mini Nasdaq futures change direction and snap lower to match the Micro E-Mini S&P 500 futures.

Past Performance is not indicative of future results.

Traders can use overlaid charts like these or look at ratio charts like the SPY/QQQ to get a different perspective.

The strategy above is part of our post on Timing Entry And Exits With Divergence Trading | Plus 7 Common Mistakes to Avoid. Read the full article here.

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There is a substantial risk of loss in futures trading. Past Performance is not indicative of future results.


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