Hello, guys here is one of the most important lessons about trading. If you want to become a successful trader or investor then you must learn how to spot and trade divergence like a pro. so let’s learn How To Trade Divergence.
Divergences should be one of your most important tools because they signal momentum coming into the main trend or indicate a possible reversal when the trend is nearly over. You don’t even have to learn all the concepts about trading if you master the divergences with basic price action and support and resistance levels you can easily trade Crypto, Stocks, Forex or any other instruments you prefer.
So by the end of this video, you’ll learn:
- The power of divergences
- How to spot divergences easily
- The best indicators you must use to trade divergences
Before we continue if you are new to the channel and you find value or you’ll learn something new please consider subscribing and leave us a like to show your support. Learn How To Trade Divergence.
What is the divergence?
Almost all technical indicators track the evolution of price movement meaning that they like the price that’s why most of the oscillators using technical analysis are lagging indicators when the price of a stock moves upward the indicator also moves upward when the price moves down the indicator also moves downward but sometimes however a visual discrepancy is seen between the price in the indicator of this visual discrepancy is known as a non-confirmation and is called a divergence. Learn How To Trade Divergence.
What are the types of divergence?
There are 2 types of divergences, Regular divergences and Hidden divergences.
What is regular divergence?
A regular divergence is characterized by higher high prices but a lower indicator value during an uptrend and lower low prices followed by higher indicator values during a downtrend. A regular divergence is considered a leading indicator because it can identify with good accuracy tops and bottoms it also helps traders to sell near the top and why near the bottom, in other words, a classic divergence signals a possible trend reversal.
What are the types of regular divergence?
A regular divergence has two patterns, The first one is the regular bearish divergence, a regular bearish divergence appears during an uptrend when the price is making higher highs but the indicator indicates a lower high as you can observe in this chart the price was in a strong bullish trend with a price pushing for new highs however the indicator failed to record new highs on the contrary recording a lower high that’s a strong indication of market exhaustion and a possible sign of market reversal or at least a short-term correction. Learn How To Trade Divergence.
The Second one is the regular bullish divergence, a regular bullish divergence appears during a downtrend when the price is making lower lows but the oscillator records higher lows. Again when we analyze this chart we see that a price plunged quite aggressively with the price seeking for new lows this move was not confirmed by the indicator which failed to record new lows on a contrary recording higher lows, thus the regular bullish divergence suggests a possible market reversal or a short-term correction. Learn How To Trade Divergence.
What is hidden divergence?
Besides regular divergences, we also have hidden divergences. A hidden divergence is a visual non-confirmation characterized by higher lows of the price but lower indicator values during an uptrend and lower highs of the price and higher indicator values during a downtrend. Hidden divergences signal continuation moves in the direction of the prevailing trend so that’s the main difference between the regular divergences and the hidden ones. The regular divergences indicate reversals while hidden divergences indicate continuation.
What are the types of hidden divergence?
Hidden divergence has two patterns first we have the bullish hidden divergence, in a bullish hidden divergence the oscillator makes lower lows but the price makes either a higher low or a double bottom low. This type of pattern occurs mainly during upward corrections. Learn How To Trade Divergence.
let’s take a look at this example the price was in a very strong upward trend and recorded an important correction. The price resumed its initial upward direction they recorded another pullback and you can observe the price failed to record new lows and closed higher than the previous downward swing. however if we look at the oscillator in recorded a lower low thus forming a hidden divergence and signalling that a possible upward movement is on a cards.
Then we have the bearish hidden divergence, in a bearish hidden divergence the oscillator makes higher highs what the price makes either lower highs or double bottom highs. This type of pattern appears mainly during downtrend corrections, in this example after a strong uptrend the recent price action indicated a downward momentum with the price making lower highs despite the fact that the price was making lower highs the oscillator recorded higher highs thus forming hidden divergence. Learn How To Trade Divergence.
How to identify and trade Divergence?
Relative Strength Index (RSI) Indicator
Now let’s see the best indicators you could use to identify divergences. The relative strength index is a powerful indicator and one of the most reliable oscillators when used correctly a great use of the relative strength index is to search for divergences between the RSI and the price of the stock. let’s use the Tesla stock as an example with RSI added in the chart and let’s see what we find.Here is a regular divergence and here is a hidden divergence. Learn How To Trade Divergence.
Commodity channel index (CCI) indicator
Another great indicator for divergence trading is the CCI the commodity channel index is an oscillator used in technical analysis to measure the variation of a stock’s price from a statistical mean. There are two main methods used by traders to interpret the commodity channel index looking for divergences and as an overbought or oversold indicator. Let’s analyze this Amazon chart in this area we have a regular divergence and here is that hidden divergence. If you want to learn more about the CCI go watch an in-depth video about this indicator here. Learn How To Trade Divergence.
On-balance volume (OBV) indicator
Another useful tool for spotting divergences is the obv the on-balanced volume is a momentum indicator that relates volume to price change. The obv shows if the market volume is flowing into or out of a security or stock divergences occur when the price movement is not confirmed by the obv. I use the obv mainly for regular divergences. In this example we have the market making higher highs and higher lows but gob be signalling the end of the trend. Learn How To Trade Divergence.
My favorite indicator for identifying divergences the stochastic the stochastic oscillator is a momentum indicator excellent at pinpointing divergences. On this chart we have a regular divergence here and a hidden divergence here. Learn How To Trade Divergence.
Money Flow Index (MFI) indicator
Use the money flow index for spotting divergences this indicator measures the strength of money flowing in and out of a security or a stock the money flow index is related to the relative strength index but with a twist while the RSI only incorporates price the money flow also incorporates the volume the money flow index is great at spotting divergences because it also has a big advantage it incorporates the volume. In this example we have a clear a regular divergence and a hidden divergence here. Learn How To Trade Divergence.
Another good indicator for divergence trading is the awesome oscillator the awesome oscillator compares the recent momentum with a momentum over a wider upper frame of reference the indicator is plotted as a histogram and is used to confirm the trends and determine possible cycle turning points. If you want to learn more about the awesome oscillator here is a great tutorial on how to trade with it. Learn How To Trade Divergence.
The momentum indicator can also generate decent divergence signals here we have a regular divergence signaling the end of the trend and here we have a hidden divergence indicating a continuation of the trend. Learn How To Trade Divergence.
Moving Average Convergence Divergence (MACD) indicator
Of course finally the MACD probably the most used indicator for spotting divergences by traders, not by me personally in my opinion the MACD is one of the worst indicators but you can find some divergence signals with it, the regular ones in particular like the obvious signal on this chart. Learn How To Trade Divergence.
Now here is an important tip divergences are more reliable when you are using higher timeframes, a signal that is produced on the 4-hour chart or on the daily chart is more reliable than a signal produced on the 15-minute chart where the vergence is more reliable on higher time frames because the market doesn’t move as fast and is easier to define trends you’ll see the pattern developing and you’ll have time to make the correct decisions.
So if you learn something new and found value please consider subscribing to our channel share and like this video as it will help us a lot in the future until next time. – Reza Abbaszadeh