What is Divergence?
Divergence is denoted, in an uptrend when price has made a new high, however on the oscillator it has made a low. The oscillator is looking at the levels in the overbought, and over sold areas, which are the more profitable trades.
The Divergence is able to detect a markets reversal which is about to occur by a simple comparison of the indicator with price.
In a down trend, divergence is noted when price has made a lower low, however on the oscillator it has not.
Divergence can not only be found in oversold and over bought regions, between the two.
In an up trend although price makes a new high, the momentum for buying has run out of steam and showing only a high in the Oscillator, however this is not a higher high. This is divergence.
In a down trend, the price makes a new low, the momentum for selling has run out of steam and showing a low on the Oscillator, however this is not a lower low. This is divergence.
Functions of Divergence
To detect trend reversal – Normal Divergence
To detect continuation of the trend – Hidden Divergence
Oscillators which can be used
- MACD ( Moving Average Convergent and Divergent )
- Awesome Oscillator
Divergence , can be found in all time frames from 1 min to Monthly.
However please note the lower time frames, more chance to be stopped out, however the trader will not need to wait so long compared to Monthly to find the Divergence Set up.
On the larger time frames, the trader will have to wait months or even years before the Divergence sets up, the trade will take also several months before it exhausts thereby giving pips to compensate the long wait.
Patience and Discipline key traits for a profitable trader.
Examples For Selling with Divergence
For Buying with Divergence
How to trade with Divergence ?
1) Identify Divergence
2) Use candle Stick patterns for indecision or reversal.
Entries for going Long
Place Stop loss 20 -30 pips below longest wick or low ( on a down trend) – to Enter to go LONG.
3) Aggressive entry place entry on the low of in decision candle
4) Conservative entry place entry on close of candle stick reversal pattern
Entries for going Short
Place Stop loss 20-30 pips above longest wick or high ( on a Up trend) – to Enter to go SHORT
5) Aggressive entry place entry on the low of in decision candle
6) Conservative entry place entry on close of candle stick reversal pattern
Below an example of an Aggressive entry, entry on candle low of the Doji.
Entry on the low, will be as a breakout entry.