Stock Trading Divergence Stocks Trading SETUPS SUMMARY
Classic Bearish - HH stocks price, LH indicator - Indicates underlying weakness of a stocks trend - Warning of a possible change in the stocks trend from up to down.
Classic Bullish - LL stocks price, HL indicator - Indicates underlying weakness of a stocks trend - Warning of a possible change in the stocks trend from down to up.
Hidden Bearish - LH stocks price, HH indicator - Indicates underlying strength of a stocks trend - Mainly found during corrective rallies in a downward trend.
Hidden Bullish - HL stocks price, LL indicator - Indicates underlying strength of a stocks trend - Occurs mainly during corrective declines in an upward stock trend.
Illustrations of the divergence terms:
M-shapes dealing with Stock price highs
M-shapes
W-shapes dealing with Stock price lows
W-shapes
These are the shapes to look for when looking for when using these stocks setups.
One of the best indicator for this stocks setup is the MACD Stock Technical Indicator - as a stock trading signal MACD divergence is a setup to enter a trade. But as with any signal there are certain precautions that have to be observed to make this stocks signal a setup. Getting straight in to a trade as soon as you see this stocks setup is not the best strategy. This setup should be used in combination with another technical indicator to confirm the direction of the trend. A good system to combine with is the moving average crossover system.
Be aware this stocks setup on a smaller time frame is not so significant. When divergence is seen on a 15 minute chart it may or may not be very important as compared to the 4 hour chart timeframe on MetaTrader 4 stock platform.
If seen on a 60 minute chart, 4 hour chart, or daily chart timeframe, then start looking for other factors to indicate when the stocks price may react to the divergence.
This brings us to a key point when using this stocks signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in stocks price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this stocks setup is not always the best strategy.
Many investors get caught out by entering the stocks market too soon when they see MACD divergence. In many cases, stocks price has still got some momentum to continue in the current direction. The investor who has jumped in too soon can only stare at the screen in dismay as stocks price shoots through his stop loss taking him out.
If you simply look for this stocks setup without any other considerations you will not be aligning yourself with the best odds, so to increase the odds of making a successful trade you should also look at other factors, specifically other indicators.
What other factors should you consider when using this Stock setup?
1. Support level, Resistance levels & Stocks Trading Fibonacci levels on higher Stocks Chart Time Frames
Another way to greatly increase the odds of a winning trade is to observe the higher chart timeframes before opening an order based on the lower time frames.
If you observe that the hourly, 4 hour or daily Stocks Trading chart has met a major resistance, support or Fibonacci level then the probability of a successful trade based on divergence on a lower time frame at this point increases.
2. Reward to Risk Ratio: Stocks Trading Money Management Rules
And finally, when looking for divergence, it is very important that you enter the trade correctly, so that you have a good risk/reward ratio and only open stocks transactions that have more profit potential than what you are risking. If you understand how to enter a transaction properly, you can measure your risk/reward before you open a transaction. That way, you can only choose to open orders that offer a favorable ratio.
Finally, when used correctly and combined with other technical indicators to confirm this stocks signal, divergence setup can offer huge profit potential.
