DIVERGENCE TRADING

Divergence is an important market leading indicator. It is determined by comparing price action with oscillator action. In other words, an oscillator, like stochastic, relative strength index, MACD histogram and so on is needed to be compared with the price action so as to spot a divergent market. When the market is making high highs and lower lows or higher lows and lower highs, oscillators are traditionally expected to follow price, but we have a reversal situation when oscillator is not doing what the price is doing in terms of swing formations
If price is making a higher high and oscillator is making lower high then we have a bearish classic divergence. If price is making a lower low and oscillator making higher low, then we have a bullish classic divergence. If price is making a higher high and oscillator is making lower high then we have a bearish classic divergence. If price is making a lower low and oscillator making higher low, then we have a bullish classic divergence. CLASSIC DIVERGENCIES WILL LEAD US TO PRICE REVERSALS.

iF price is making a higher low and oscillator making lower low then we have a bullish hidden divergence. If price is making lower high and oscillator is making higher high then we have bearish hidden divergence. HIDDEN DIVERGENCIES WILL LEAD US TO PRICE CONTINUATION TREND.

Click here for the rules for trading divergence

I will be providing a trading plan on how to trade classic and hidden divergencies.

Apply stochastic of 30,18,8 to a 30min chart and you will have divergencies as indicated below.