Oscillators
Oscillators are any bits of information or data moving back and forth between two points. It is usually used as a signal for a buy or a sell on either side of the range it is moving in. The Relative Strength index which you might hear of is an example of an oscillator, however I will not be going into detail about it as we do not personally do not use it for my trading. When there is a change in momentum, this often signals weakness in a trend. The indicators are designed to signal a possible trend reversal.
The only oscillator we use in our trading is the MACD. Moving Average Convergence Divergence. Feel free to look into other indicators, however, we believe that the MACD has been our favourite to use.
DIVERGENCE
Divergence is simply when we will be looking at the difference in price action against an indicator such as MACD, RSI, Stochastic.
The simplest way to put it, when the price is making higher highs the indicator should also be making higher highs, and lower lows then vice versa. If the price is making higher highs but the indicator is not, then the two are diverting from each other and we have divergence. This is a great sign for a weakening trend and a potential shift in momentum.
The two types include regular and hidden.
Regular divergence
When the price is making lower lows (LL), and the oscillator is making higher lows (HL), then we have what we call regular bullish divergence which usually appears at the end of a downtrend.
If the price makes a higher high (HH) but the oscillator makes a lower high (LH), then we have regular bearish divergence. This usually occurs at the end of an uptrend.
Hidden Divergence
Divergence does not necessarily have to show when the trend will reverse, it can show trend continuation, and since we try to avoid trading against the trend this can be of great help.
When the price makes a higher high, but the oscillator makes a lower low, we have what we call hidden bullish divergence.
When the price goes to make a lower high but the oscillator makes a higher high, this is what we call hidden bearish divergence.
Always remember that in conjunction with these signals, we need other signs in order for us to enter the trade. We cannot solely base our analysis on oscillator divergence, otherwise we can find ourselves on the wrong side of the trade.
Wait for the crossovers of the indicators to be sure, this can happen after the price has begun to move, however it can be an assurance that the divergence observed is correct.
Always remember if the market is moving sideways, there are no clear indications of divergence so do not force it. Always connect the latest in the price action, meaning if the price is bullish and is retracing, you are looking at higher highs. Focus on the highs and lows of the indicators and ignore any small minor movements in between. Wherever lines are drawn on the price, they have to line up with the oscillator and that is where the line will also have to be drawn, everything has to line up.
Oscillators are any bits of information or data moving back and forth between two points. It is usually used as a signal for a buy or a sell on either side of the range it is moving in. The Relative Strength index which you might hear of is an example of an oscillator, however I will not be going into detail about it as we do not personally do not use it for my trading. When there is a change in momentum, this often signals weakness in a trend. The indicators are designed to signal a possible trend reversal.
The only oscillator we use in our trading is the MACD. Moving Average Convergence Divergence. Feel free to look into other indicators, however, we believe that the MACD has been our favourite to use.
DIVERGENCE
Divergence is simply when we will be looking at the difference in price action against an indicator such as MACD, RSI, Stochastic.
The simplest way to put it, when the price is making higher highs the indicator should also be making higher highs, and lower lows then vice versa. If the price is making higher highs but the indicator is not, then the two are diverting from each other and we have divergence. This is a great sign for a weakening trend and a potential shift in momentum.
The two types include regular and hidden.
Regular divergence
When the price is making lower lows (LL), and the oscillator is making higher lows (HL), then we have what we call regular bullish divergence which usually appears at the end of a downtrend.
If the price makes a higher high (HH) but the oscillator makes a lower high (LH), then we have regular bearish divergence. This usually occurs at the end of an uptrend.
Hidden Divergence
Divergence does not necessarily have to show when the trend will reverse, it can show trend continuation, and since we try to avoid trading against the trend this can be of great help.
When the price makes a higher high, but the oscillator makes a lower low, we have what we call hidden bullish divergence.
When the price goes to make a lower high but the oscillator makes a higher high, this is what we call hidden bearish divergence.
Always remember that in conjunction with these signals, we need other signs in order for us to enter the trade. We cannot solely base our analysis on oscillator divergence, otherwise we can find ourselves on the wrong side of the trade.
Wait for the crossovers of the indicators to be sure, this can happen after the price has begun to move, however it can be an assurance that the divergence observed is correct.
Always remember if the market is moving sideways, there are no clear indications of divergence so do not force it. Always connect the latest in the price action, meaning if the price is bullish and is retracing, you are looking at higher highs. Focus on the highs and lows of the indicators and ignore any small minor movements in between. Wherever lines are drawn on the price, they have to line up with the oscillator and that is where the line will also have to be drawn, everything has to line up.