The divergence is the difference between the return obtained by investors in a DARWIN and the theoretical return of a DARWIN. It is shown as a percentage and its value can be either negative or positive.
What is it?
The divergence is the difference between the return obtained by investors in a DARWIN and the theorical return of a DARWIN. It is shown as a percentage and its value can be either negative or positive.
From a technological standpoint, it is impossible to replicate both traders' and investors' trades identically, therefore there will always be some divergence.
How is it caused?
Investors may experience divergence due to 3 reasons:
1. Base currency
When the investor's Wallet currency differs from the DARWIN's base currency, there can be small differences in the value of trades, due to the value of both currencies whilst the trade remains open.
Their long term evolution is random, therefore trades can have both positive and negative divergence due to base currency.
2. Latency
Due to technological reasons, investors' trades are always replicated with a delay of a few milliseconds compared with those of the traders so, in that brief space of time, the market conditions can alter and as such the price at which the trades are executed.
As in the case of the base currency, divergence due to latency is random.
3. Investor volume
This is the main cause of systematic divergence. It happens when the capital under management in a DARWIN is high enough that when it tries to execute a large volume trade it causes slippage in the market price, offering a worse execution price to investors than the one obtained by the trader.
All things being equal, the higher the volume invested in a DARWIN, the higher the chances investors might have of experiencing a negative divergence.
How can you analyse the divergence?
You can find information about a DARWIN's divergence in the following sections:
Divergence in %
In the DARWIN's ''Investor's'' tab, you will see a graph with a simulation that compares the % return that would have been obtained by investors compared with the DARWIN should investors have remained invested in the DARWIN for the selected time period, and taking into account the current monthly divergence.
As you can observe in the chart, no matter how small the negative divergence might be, it could end up having a big impact on your return in the long term.
This graph includes the current monthly theoretical divergence the DARWIN had, but it may differ from the real historical divergence. This monthly divergence is obtained based on the divergence of the last 100 orders, and is the most likely to occur.
Divergence by order
Also on the ''Investors'' tab, there is a graph with dots in different colours and sizes, which represent the orders executed for investors.
The vertical axis represents the latency in milliseconds, and the horizontal axis shows the divergence in Pips (red dot = negative divergence; green dot = positive divergence).
Here you can see the difference in execution between the trader and the investors trades over the last 100 orders.
Monthly divergence
Furthermore, from the information shown in the "Investors" tab on the DARWIN's page, you can see the latest calculation of the estimated monthly divergence caused by the volume of investors taking into account the most recent 100 orders. This is the divergence taken as a reference to calculate the historical investor's performance at "Investors" tab graph.
Evolution of divergence over time
As mentioned, the monthly divergence we display takes into account the last 100 orders of investors and, from those 100, only the orders that get executed with a moderate latency, i.e. in less than 400 ms or average latency if average latency is higher than 400 ms.
We do this since divergence could be caused by the price movement happening in the interval between the trader’s trade and investors’ replicating trade (latency), and this could distort the divergence calculation.
As a consequence, in some cases, calculated divergence can be very erratic due to higher than average latency produced by the trader trading systematically in highly volatile conditions.
This can result in the divergence data not consistently reflecting the reality of the type of trading undertaken by the DARWIN and the real divergence that investors suffer.
For example, at some point, we had to close to new purchases DARWIN PME because, despite its history of negative divergence, there was a brief period during which its divergence became positive. Many investors dared to invest in it until, on one unfortunate day, they suffered a massive negative divergence.
Thanks to the chart displaying evolution of divergence over time - available under the "Investors" tab, as well - investors are able to:
- Identify cases like DARWIN $PME, historically high divergence without an associated increase in investment volume.
- Know whether current divergence – especially if it's negative – is circumstantial due to good/bad execution of a few isolated orders or is in effect caused by an increase in investment volume.
How to see your investments' divergence
From the DARWIN's Investment Platform, on the ''Invested DARWINs'" tab, and reflected in the ''Divergence'' column, you will be able to see the live accumulated divergence that you have in each of the DARWINs you have invested in.
A divergence of 0.39 % means that the return of your investment in this DARWIN is 0.39 % higher than the notional return of the DARWIN since you invested in it.
You can calculate the notional return of the DARWIN by dividing the DARWIN's current quote by the average quote at which you bought the DARWIN.
The difference between this return and your actual return is your investor divergence.
Tips
When it comes to analysing DARWINs, we recommend you to bear the following tips in mind.
Do not undervalue the monthly divergence
No matter how small it may be, divergence will accrue over time and could end up having a significant impact if you stay invested in a DARWIN over a large time period.
Divergence due to base currency
If you invest in DARWINs with a base currency different to yours, you must take into account that, the longer the duration of the traders' trades, the more likely you are to see significant divergence due to base currency.
But you must also bear in mind that if you stay invested for a relatively long period of time in that DARWIN, and due to its random behaviour, divergence tends to balance itself out.
Without investors, we cannot estimate the divergence
Divergence can only be calculated for DARWINs that already have investors who have sent at least 10 orders.
Divergence less than 400 ms
We consider that divergence with a latency of less than 400 milliseconds has been caused by investor volume.
Therefore, orders with a latency above 400 ms are not taken into account when calculating the monthly divergence.
Divergence over 400 ms
If the divergence is the result of high latency, over 400 milliseconds, we consider that this is due to technological causes, which could be a delay in confirming the order executed by the trader on behalf of our Liquidity Providers.
This could be during important new releases with a noticeable increase in volatility or during market rollover periods when liquidity is scarce.
This result is largely random and sometimes will go in your favour, and other times against you, therefore the effect balances itself out over time in the long run.
Beware of DARWINs with systematically negative divergence without an increase in investment volume
Investors should bear in mind that DARWINs that start to have systematically negative divergence without an increase in investment volume, are DARWINs that – with very few exceptions – have offered few guarantees in the past.
Systematically negative divergence without an increase in investment volume very probably means that the trader's orders are identified by liquidity providers as toxic flow.
This is normally due to the trader trading in highly volatile/low liquidity conditions, or the trader using an EA that’s sold also outside of Darwinex.
Divergence in demo portfolios
Divergence in demo portfolios is not indicative of divergence in live portfolios.
Demo portfolio orders are sent from a demo server, which is different from our live server. Therefore, the execution time will vary between the two.
Demo execution might not reflect the differences that might exist between the market depth seen in the order book and the real market depth (which do exist in a live environment).
Do you want to learn more?
If you want to learn more about divergence, we recommend the recording of the following webinar presented by our CEO, Juan Colón: