What is divergence?

The divergence is the difference between the return obtained by the 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.

What is it?

The divergence is the difference between the return obtained by the 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 the 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 development is random, therefore trades can have both positive and negative divergence due to base currency.

2. Latency

Due to technological reasons, the investors' trades are always replicated with a delay of a few milliseconds compared with those of the traders and, 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 an execution price to investors worse than the one obtained by the trader.

Under the same conditions, the higher the volume invested in a DARWIN, the higher the negative impact will be on the divergence.

How can we 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.

Divergencia GTD

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.

Divergence by order

Also in 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 over the last 100 orders.

Burbujas divergencia

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 orders.

Divergence latency

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.

This is because in all other cases, divergence can be caused by the price movement happening in the interval between the trader’s trade and investors’ replicating trade. This could distort the divergence calculation.

As a consequence, in some cases, calculated divergence can be very erratic due to the huge dispersion 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 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.
evolution-divergence-over-time

How to see your investments' divergence

From the DARWIN's Terminal, in 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. 

divergence

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 bear these 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 traders' trades last, 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 which 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 down 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 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 having 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, different from our live server, therefore the execution time will vary between the two.

Demo execution does simulate market depth. However, it 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 this recording of this webinar presented by Darwinex CEO Juan Colón: