Unlocking the Power of Divergence: Introducing the Neptune Strategy

Divergence plays a pivotal role in market analysis, signaling potential trend reversals. Consider this scenario: While the asset price continues to establish new highs, the Relative Strength Index (RSI) does not mirror this ascent. This incongruence, known as divergence, suggests that the prevailing market trend may be nearing its end.

The Relevance of Divergence for Traders

Divergence stands as a robust analytical tool, frequently employed by experienced traders to discern impending reversals in the market. Augmenting this analytical approach, our newly developed Neptune Strategy leverages the RSI to identify and capitalize on both bullish and bearish divergences.

A Deeper Look into Divergence

Divergence, at its essence, denotes a disparity between price and momentum indicators such as the RSI.

Bullish Divergence: When the price descends to new lows and the RSI does not corroborate this descent, it often suggests a potential shift toward an upward trend.
Bearish Divergence: Conversely, if the price establishes new highs but the RSI remains static or declines, it could indicate a forthcoming downturn.

The Logic Behind the Neptune Strategy

The Neptune strategy, which is a NQ long-short swing system based on 15min bars, employs a combination of Relative Strength Index (RSI) and Exponential Moving Average (EMA) to identify potential market reversals. For long trades, the strategy seeks out bullish divergences: situations where the asset's price is setting new lows but the RSI does not confirm these lows, suggesting the market could be turning bullish. The strategy operates with a user-defined maximum bar distance, RSI length, and oversold RSI threshold for long trades. Once a bullish divergence is identified and the closing price surpasses the EMA, a long position is initiated. Profit-taking or stop-loss conditions are determined by the specified percentages.

Conversely, for short trades, Neptune looks for bearish divergences: where the price achieves new highs but the RSI remains subdued or even declines. This hints at a potential bearish reversal. Similar to its long trade counterpart, the strategy has user-defined parameters for bar distance, RSI length, and an overbought RSI threshold for short trades. When a bearish divergence is ascertained and the closing price falls below the EMA, a short position is entered. Again, specific percentages determine the exit conditions for profit-taking or stop-loss.

Integral to the strategy's success is its EMA component, which is used as a trend filter, ensuring trades align with the prevailing trend. By harmoniously integrating RSI divergence detection with EMA trend confirmation, the Neptune strategy offers traders a robust framework for both long and short positions.

Neptune's last trade came in recently and it was on a short side of the market.

Neptune, Last Trade

Neptune Strategy: Performance Metrics

Delving into the performance metrics of the Neptune Strategy:

Profitability: The strategy has yielded a commendable profit of $232K over a span of 4 years, trading a single NQ contract, considering a $1.2 commission per contract and accounting for 2 ticks of slippage.
Risk Management: The strategy has effectively managed risk, maintaining the maximum drawdown at $13K.
Profit Factor: It boasts a substantial profit factor of 2.6 even though the win rate is only 35%

A distinguishing feature of the Neptune strategy is its selectivity. Instead of attempting to engage with every market fluctuation, it prioritizes discerning and leveraging the most promising trends, analogous to a surfer selecting only the ideal wave.

Neptune Strategy Performance: Last 4 Years