A divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data.
- What Is Divergence?
- How To Trade A Divergence?
- Make sure your glasses are clean
- Draw lines on successive tops and bottoms
- Connect only the top and bottom
- Keep an eye on the cost
- Your swing highs and lows should be consistent
- Keep price and indicator swings aligned
- Check out the Slopes
- You should catch the next one if the ship has sailed
- Take a bit of a step back
Divergence warns that the current price trend may change direction in some cases. This can be useful because it tells you that the price is likely to change direction. Divergence cheat sheet is a concept that has a root in technical analysis when the price of an asset is moving in the opposite direction of the technical indicator. Regular divergence and hidden divergence are the two types of divergences. In this article, we will provide a step-by-step divergence trading guide.
What Is Divergence?
Divergence is a type of chart pattern that shows when prices are moving in a direction opposite to a technical indicator’s direction. Technical indicators are used to analyze the direction and speed of price movements, and help traders decide whether to buy or sell securities. Divergence invalidates technical indicators such as oscillators. That’s why it’s such an effective indicator.
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How To Trade A Divergence?
Sometimes a divergence doesn’t lead to a strong reversal and sometimes price just enters a sideways consolidation after a divergence. A divergence does not mean a complete trend shift, but it does signal a loss of momentum. Here is a step-by-step on how to trade divergence.
Make sure your glasses are clean
The price must have formed one of the following to create divergence.
- The last high was higher than the current one
- Double Top
- The previous low was lower than the present one
- There have been price scenarios
- Double Bottom
- Unless one of these four is present, don’t bother looking at an indicator
You are not trading a divergence if not. You’re just imagining. Go to the store and buy some new glasses.
Draw lines on successive tops and bottoms
Look at the recent price action, now that you have some action. You can only see one of the four things: a higher high, a flat high, a lower low, and a flat low. Draw a line backward from that high or low to the previous high or low. It has to be on the top and bottom of the charts.
Connect only the top and bottom
You can connect the tops once you see two swing highs established. You connect the bottoms if there are two lows made.
Keep an eye on the cost
You connected two tops or two bottoms to the trend line. Take a look at your preferred indicator and compare it to price action. Remember that you are comparing its top and bottom.
Your swing highs and lows should be consistent
If you draw a line connecting two highs on price, you must also draw a line connecting the two highs on the indicator. Ditto for highs as well. If you draw a line connecting two lows on price, you have to do that on the indicator. They need to match each other.
Keep price and indicator swings aligned
If you identify the highs or lows on the indicator, you must line them up with the price highs or lows.
Check out the Slopes
If the line connects the indicator tops/bottoms with the price tops/bottoms then Divergence is possible.
You should catch the next one if the ship has sailed
The divergence should be considered if the price has reversed and moved in one direction for some time.
Take a bit of a step back
On longer time frames divergence signals are more accurate. You receive fewer false signals. If you structure your trade well, your potential can be huge.
Final Words
We hope this guide helps you to trade divergence. The above information allows traders to make key decisions such as trade entry points, and exit points. Divergence should not be mistaken for trade confirmation and should be combined with other trading techniques for better results.
