How often have you entered a trade based on your regular oscillator indicator, or price action,? only to find the market moves in the opposite direction, then blame your trading system as a dud.
Divergence can be identified using any oscillator indicator like the Stochastic, MACD, RSI and CCI, etc, etc. Divergence measures the relationship between the price and the oscillator indicator. With practice divergence can easily be identified and used as a leading indicator that allows buy or sell opportunities near the top or bottom of the market. This in turn supports good money management principals with small stops and large potential profits.
The easiest way to identify divergence is to monitor your highs and lows as discussed in trends and trend lines. When price is making higher highs, your oscillator should be making the same higher highs. If price is making lower lows your oscillator indicator should also be making lower lows. If this is not the case then it means that price and oscillator are diverging from each other.
Once we have spotted divergence, our next task is to identify the type of divergence which will then enable us to to determine whether price is likely to reverse or continue in the same direction.
Divergence can be labeled as either regular, or hidden divergence. Regular divergence generally indicates a trend reversal, whilst hidden divergence indicates a continuation of the current market trend.
There are generally 4 types of divergence.
Divergence can be identified using any oscillator indicator like the Stochastic, MACD, RSI and CCI, etc, etc. Divergence measures the relationship between the price and the oscillator indicator. With practice divergence can easily be identified and used as a leading indicator that allows buy or sell opportunities near the top or bottom of the market. This in turn supports good money management principals with small stops and large potential profits.
The easiest way to identify divergence is to monitor your highs and lows as discussed in trends and trend lines. When price is making higher highs, your oscillator should be making the same higher highs. If price is making lower lows your oscillator indicator should also be making lower lows. If this is not the case then it means that price and oscillator are diverging from each other.
Once we have spotted divergence, our next task is to identify the type of divergence which will then enable us to to determine whether price is likely to reverse or continue in the same direction.
Divergence can be labeled as either regular, or hidden divergence. Regular divergence generally indicates a trend reversal, whilst hidden divergence indicates a continuation of the current market trend.
There are generally 4 types of divergence.
- Regular Bullish Divergence
- Regular Bearish Divergence
- Hidden Bullish Divergence
- Hidden Bearish Divergence
When price makes a lower low (LL) but the oscillator makes a higher low (HL), this is considered Regular Bullish Divergence and signifies a possible trend reversal.
When price makes higher highs (HH) but the oscillator makes a lower high,(LH) this is identified as Regular Bearish Divergence and indicates a possible trend reversal.
When price makes a higher low(HL) but the oscillator makes a lower low(LL) this is identified as Hidden Bullish Divergence and signifies a possible continuation of the current trend.
When price makes a lower high (LH) but the oscillator makes a higher high (HH), this is dentified as Hidden Bearish Divergence and signifies a possible continuation of the current trend. Always bear in mind, divergence should be used as an indicator, not necessarily a signal to enter the market, as too many false signals are given. They do not appear that often, but when they do we need to be attentive as this could lead to a possible reversal that allows us to identify the move early on and make a large profits for a relatively small risk.
Once spotted, divergence identifies good trade setups that when confirmed by the use of additional trading tools give us high probability winning trades for low risk.
Summary
- Even if you do not use an oscillator in your regular trading strategy it will prove invaluable in identifying divergence.
- Monitor your highs and lows on the chart and compare them regularly with your oscillator.
- Identify the correct divergence to determine possible market direction.
- If you cannot identify the correct divergence rather stay out of the market until price and oscillator are once again in sync.
- Regular divergence can help you identify a trend change early on that could result in large profits.
- Hidden divergence can help you identify a continuation of the current trend that can also result in larger profits.
- Divergence is not fool proof and will result in higher probability wins when used in conjunction with other indicators.
- Add your trend lines to each new high or low on both oscillator and chart in order to easily identify divergence.
Divergence Type Price Oscillator Trade Regular Higher High Lower High SELL Regular Lower Low Higher Low BUY Hidden Higher Low Lower Low BUY Hidden Lower High Higher High SELL
2 comments:
This is very useful information. I will link to it in an upcoming post. Keep up the good work.
Thanks for the info. This is useful in my new job now which is a Trader. I was connected to a international company as a business consultant, my task is to find investor who invest us and same time monitor their accounts and give advices whether they are going to buy or sell. Since we consultant are not allowed to trade clients money. maybe, If u r interested to invest just let me anyway,trading is online and u r the one who trade it, ur also the one who deposit ur money 2 bank.
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