Divergence Oil Trading Setups
Divergence is one of the trade set ups used by Oil traders. It involves looking at a oil chart & one more indicator. For our examples we shall use the MACD indicator.
To spot this trading setup find two chart points at which crude oil price makes a new swing high or a new swing low but the MACD indicator does not, indicating a divergence between crude oil price & momentum.
To look for divergence we look for two chart points, two highs that form an M-shape on the Crude Oil Trading chart or two lows that form a WShape on the Oil Trading chart. Then look for the same M-shape or W-Shape on the Oil Trading indicator you use to trade.
Example of a Crude Oil Trading Divergence Trade Setup:
In the oil chart below we identify 2 chart points, point A and point B (swing highs). These 2 points form an M-shape on the crude oil 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 and B.
We then draw one line on the Crude Oil Trading chart & another line on the MACD trading technical indicator.
Drawing Divergence Oil Trading Lines
The chart above shows example of one of the 4 types of divergences, the one above is known as hidden bearish divergence, one of the best type to trade. Types of divergences are covered in the next tutorial.
How to spot divergence
In order to spot Oil Trading diverging signal we look for the following:
- HH=Higher High- 2 highs but the last one is higher
- LH= Lower High- 2 highs but the last one is lower
- HL=Higher Low- 2 lows but the last one is higher
- LL= Lower Low- 2 lows but the last one is lower
First let us look at the illustrations of these trading terms:
M-shapes dealing with Oil price Highs
W Shapes dealing with Crude Oil price lows
Example of M Shapes
Examples of W Shapes
Now that you've learned the divergence trading terms that are used to explain trading set-up. Let us look at the 2 types of divergences & how to trade these chart setups.
There two types are:
- Classic Oil Trading Divergence
- Hidden Crude Oil Trading Divergence
These two set ups are explained on the following guides below
