Hey guys!
In this post, we are going to learn how to trade divergencies, how to find them on the chart, and how to use them in our automated trading strategy.
Introduction
Divergence occurs when the direction of an asset’s price and the direction of a technical indicator move in opposite directions. Finding divergence between price and momentum indicators, such as the RSI and MACD, is a useful tool for identifying potential changes in the direction of an asset’s price and is therefore a cornerstone of many trading strategies.
Types of divergencies
There are 4 major types of divergencies:
Bullish Divergence
Price is printing lower low while the technical indicator shows higher lows. This signalizes a weakening momentum of a downtrend and a reversal to the upside can be expected to follow.
Hidden Bullish Divergence
Price is making higher lows while the oscillator makes lower lows. A hidden bullish divergence can signalize that uptrend will continue and can be found at the tail end of a price throwback (retracement down).
Bearish Divergence
Price is creating higher highs while the technical indicator shows lower highs. This signalizes that momentum to the upside is weakening and a reversal to the downside can be expected to follow.
Hidden Bearish Divergence
Price is making lower highs while the oscillator makes higher highs. A hidden bearish divergence can signalize that downtrend will continue and can be found at the tail end of a price pullback (retracement up).
Regular divergencies provide a reversal signal
Regular divergences can be powerful signals that a trend reversal is likely to occur. They indicate that the trend is strong but its momentum has weakened, providing an early warning of a potential change in direction. Regular divergences can be powerful entry triggers.
Hidden divergencies signal trend continuation
On the other hand, hidden divergences are continuation signals that often occur in the middle of a trend. They indicate that the current trend is likely to continue after a pullback, and can be powerful entry triggers when confluence is present. Hidden divergences are typically used by traders to join the existing trend after a pullback.
Divergence validity
The typical use of divergence is with a momentum indicator - such as RSI , Awesome oscillator , or MACD . These indicators focus on current momentum, and therefore trying to map out divergence from 100+ candles ago does not have any predictive value. However, changing the indicator's period influences the look-back range for a valid divergence.
Always use discretion when determining the validity of the divergence.
Confluences
It is important to approach divergencies with a disciplined and strategic mindset. Using them in conjunction with other forms of technical and fundamental analysis - such as Support and Resistance lines, Fib retracements, or Smart Money Concepts only increases conviction of the divergence validity.
Hope this helps!
In this post, we are going to learn how to trade divergencies, how to find them on the chart, and how to use them in our automated trading strategy.
Introduction
Divergence occurs when the direction of an asset’s price and the direction of a technical indicator move in opposite directions. Finding divergence between price and momentum indicators, such as the RSI and MACD, is a useful tool for identifying potential changes in the direction of an asset’s price and is therefore a cornerstone of many trading strategies.
Types of divergencies
There are 4 major types of divergencies:
- Bullish Divergence
- Hidden Bullish Divergence
- Bearish Divergence
- Hidden Bearish Divergence
Bullish Divergence
Price is printing lower low while the technical indicator shows higher lows. This signalizes a weakening momentum of a downtrend and a reversal to the upside can be expected to follow.
Hidden Bullish Divergence
Price is making higher lows while the oscillator makes lower lows. A hidden bullish divergence can signalize that uptrend will continue and can be found at the tail end of a price throwback (retracement down).
Bearish Divergence
Price is creating higher highs while the technical indicator shows lower highs. This signalizes that momentum to the upside is weakening and a reversal to the downside can be expected to follow.
Hidden Bearish Divergence
Price is making lower highs while the oscillator makes higher highs. A hidden bearish divergence can signalize that downtrend will continue and can be found at the tail end of a price pullback (retracement up).
Regular divergencies provide a reversal signal
Regular divergences can be powerful signals that a trend reversal is likely to occur. They indicate that the trend is strong but its momentum has weakened, providing an early warning of a potential change in direction. Regular divergences can be powerful entry triggers.
Hidden divergencies signal trend continuation
On the other hand, hidden divergences are continuation signals that often occur in the middle of a trend. They indicate that the current trend is likely to continue after a pullback, and can be powerful entry triggers when confluence is present. Hidden divergences are typically used by traders to join the existing trend after a pullback.
Divergence validity
The typical use of divergence is with a momentum indicator - such as RSI , Awesome oscillator , or MACD . These indicators focus on current momentum, and therefore trying to map out divergence from 100+ candles ago does not have any predictive value. However, changing the indicator's period influences the look-back range for a valid divergence.
Always use discretion when determining the validity of the divergence.
Confluences
It is important to approach divergencies with a disciplined and strategic mindset. Using them in conjunction with other forms of technical and fundamental analysis - such as Support and Resistance lines, Fib retracements, or Smart Money Concepts only increases conviction of the divergence validity.
Hope this helps!
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cleo.finance
Test trading strategies on crypto, stocks, indices, forex with decades of 1-min data.