Tuesday, September 26, 2017
The Trading Tigers News
Home > Education > Divergence

Divergence

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 )
  • Stochastics
  • RSI
  • CCI
  • Awesome Oscillator

 Time  Frames

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.

 

 

 

Hidden Divergence

 

Divergence can fail ! Beware , nothing in trading is 100 % confirmed . With divergence showing, it too can fail. Divergence may show up but it can fail.

 

 

Why not contribute your ideas!

%d bloggers like this: