Divergence Trading - Market Strategies
Divergence trading is one of the trade setups used by traders. It involves looking at a chart and one more indicator. For our example we shall use MACD indicator.
To spot this divergence trading setup find two chart points at which price makes a new swing high or a new swing low but the MACD indicator does not, indicating a divergence between price and momentum.
To search for divergence trading setup we look for 2 chart points, 2 highs that form an M-shape on the chart or two lows that form a W-Shape on the chart. Then look for same M-shape or W-Shape on chart indicator you use to trade.
Example of a Divergence Setup:
In the EURUSD currency chart below we spot 2 chart points, point A & point B (swing highs). These 2 points form an M-shape on the price chart.
Then using MACD indicator we check the highs made by the MACD, these are the highs that are directly below the Chart points A & B.
We then draw one line on the Forex currency chart and another line on the MACD indicator.
Drawing Divergence Lines - Divergence Trading Market Strategies
The chart above portrays example of one of the four types of divergences trading setups, the one above is referred to as hidden bearish divergence trading setup.
How to spot divergence trading setups
In order to identify divergence signal we check for the following:
- HH=Higher High- two highs but the last one is higher
- LH= Lower High- two highs but the last one is lower
- HL=Higher Low- two lows but the last one is higher
- LL= Lower Low- two lows but the last one is lower
First let us look at the illustrations of these divergence trading terms:
M-shapes for price Highs
Divergence Trading Market Strategies
W-Shapes for price lows
Divergence Market Strategies
Example of M-Shapes
Divergence Trading Market Strategies
Examples of W Shapes
Divergence Trading Market Strategies
Now that you have learned the divergence trading terms that are used to explain this trading setup. You can use these setups to look for trading opportunities when trading the market.
