9 Rules for Trading Divergences

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This first divergence signal was so strong that there was even a mini divergence shown in Figure 1 with dark red dotted lines within the larger divergence that helped to confirm the signal to go long. Sebab daripada semua buku- buku forex yang aku kaji termasuk Trading Chaos. The RSI set for 4 is showed a strong divergence.

Divergence Indicator

MACD divergence is a popular method for predicting reversals, but unfortunately it isn't very accurate. Learn the weaknesses of indicator divergence.

Divergence will always occur when there's a sharp big movement in a short amount of time move followed by less sharp movement. Divergences, Momentum and Rate of Change.

Figure 3 shows a stock gapping higher and then accelerating to the upside. This rapid and large price move causes the MACD to jump, and since the price can't continue to keep gapping higher, divergence occurs.

The divergence in this case doesn't indicate a reversal, just that the price movement is slower than the price movement gap higher that caused the indicator to jump. Each price wave of a trend is different, and not all price waves will move rapidly in a very short amount of time. The MACD gravitates toward the zero line when the price is moving sideways because the distance between the period moving average and the period moving average — what the MACD is measuring — narrows.

The moving averages shown in Figure 4 have a much harder time moving away from each other when the price is moving sideways. Signals the MACD may provide while this is occurring are degraded, because moving averages — what the indicator is based on — do not function well in choppy or sideways markets.

Moving averages tend to work better in trends. Usually, these signals will be of little use because the MACD is just fluttering around the zero line as the moving averages whip back and forth. Having discussed some of the potential problems with the MACD, and what to watch for, here are some ways to improve on MACD divergence using price action analysis as well.

Price is the ultimate indicator, with momentum indicators simply manipulating price data. Use price action to aid decision making when using the MACD. Even with these guidelines, divergence may provide beneficial insight on some trades, but not others.

It's a tool that may aid trading but is not perfect. Understanding the weaknesses, and helping to compensate by also analyzing price action, is required. Using indicators or divergence isn't a bad thing. Divergence shows the price is losing momentum relative to prior price swings, but that doesn't necessarily indicate a price reversal.

Divergence also doesn't need to be present for the trend to reverse. Divergence almost always occurs when the price makes a sharp move in the trending direction and then moves sideways or continues to trend but at a slower pace. A sharp move followed by a consolidation is often a sign of trend strength, not a reversal as MACD divergence would suggest.

Analyze price action as well; slowdowns in a trend are visible without the use of the indicator, as are price reversals. If using divergence, test its validity for aiding your entry and exit points over a several-month period to assess whether divergence improves your performance or not. For additional reading, check out: What Is Indicator Divergence? Always Utilize Price Action With Divergence Price is the ultimate indicator, with momentum indicators simply manipulating price data.

Here are some basic guidelines for doing so: Forex Divergence trading is both a concept and a trading strategy that is found in almost all markets.

It is an age old concept that was developed by Charles Dow and mentioned in his Dow Tenets. Dow noticed that when the Dow Jones Industrials made new highs, the Dow Transportation Index tends to make new highs as well and when the Industrials index made new lows, the transportation index would also follow suit.

This is because when industrial production is high, transportation is used more to ship the goods. During times of recession or slowdown, when production dropped, the transportation would also drop. The most important of all is when Dow found out that when there was a divergence between the two, it presented a possible change in the markets. For example, when the Dow Industrials made new highs and when the transportation index failed to make a high it indicated that there was some discrepancy.

This formed the basis of divergence theory which was soon developed into a trading system on its own. So, in the context of the forex markets, when price makes a new high, the oscillator also should make a new high.

Or when prices make a new low, the oscillator should ideally make a new low. When there is a discrepancy between price and the oscillator a divergence is identified. To spot the divergences in the forex markets, it is usually done comparing price to an oscillator.

The most commonly used oscillators include:. For the sake of clarity, in this article we will explain the concept of divergence trading using the RSI 14 Indicator. Divergence trade setups can be spotted in any time frames and are classified into two main types. The table below gives a brief summary of summary of various divergences and what they represent. The charts below show how each of the divergences can be traded:.

The bearish divergence is show in the above chart with price making a higher high but RSI making a lower high. A sell position at the small resistance prior to the high with stops at the recent high targeting the low formed during the divergence shows a high probability trade potential.

The bullish divergence chart above shows price making a lower low while the RSI makes a higher low. A long position can be entered at the top of the bounce after the second low is made with stops at or below the second low with target to the high formed during the divergence.