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Divergence Trading - Market Strategies

Divergence trading is one of the trade transaction set-ups used by the traders. It involves looking at a chart and one more trading indicator. For our example we shall use MACD indicator.

To spot this divergence trading setup find 2 chart points at which price makes and forms 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 pattern we look for 2 chart points, 2 highs which form an M-shape on the trading chart or 2 lows that form a W Shape on the trading chart. Then look for same M-shape or W-Shape on chart indicator you use to trade.

Explanation of a Divergence Setup:

In the EURUSD currency chart below we spot two 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 and analyze highs formed 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 & another line on the MACD indicator.

Divergence Trade Example on MACD Indicator - Divergence Strategy Trading Setups - MACD Divergence Strategy PDF

Drawing Divergence Lines - Divergence Trading Market Trading Strategies

The chart above portrays example of one of the 4 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 setup we check for the following:

  • HH = Higher High - 2 highs but the last is higher
  • LH = Lower High - 2 highs but last one is lower
  • HL=Higher Low : two lows but the last is higher
  • LL = Lower Low - two lows but the last is lower

First let us look at the illustrations/explanations of the divergence trading terms:

M-shapes for price Highs

Divergence Strategy Setups - How Do I Trade Divergence on Chart Setups

Divergence Trading Market Trading Strategies

W-Shapes for price lows

Divergence Trader Strategy - Divergence Setups Examples Tutorial

Divergence Market Trading Strategies

Explanation of M Shapes

Divergence Trader Strategies - Divergence Strategies Guides PDF

Divergence Trading Market Trading Strategies

Examples of W-Shapes

Spotting Divergence Strategies - How to Identify Divergence Setups

Divergence Trading Market Trading Strategies

Now that you as a trader 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.

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