Trading Divergences Can Be Highly Profitable!

Trading divergence patterns is not a complete trading strategy rather it is an additional tool in the technical trading toolkit of any trader

. Divergence is simply the disagreement between the price action and the indicator movement.

Now any oscillator can be used to show divergence patterns. The most commonly used oscillators include RSI, Stochastics, MACD, CCI, ROC and Williams %R. However, any oscillator can show divergence with price action.

Divergence can be regular or hidden. Regular divergence can be bullish or bearish.

In case of Bullish Regular Divergence prices make a lower low while the oscillator makes a higher low whereas in case of Bearish Regular Divergence price makes a higher high while the oscillator makes a lower high.

Divergence is a signal that the price action is losing momentum and soon a trend reversal or consolidation will take place.

The case of hidden divergence is the exact opposite of the regular divergence. Hidden divergence tells of the trend continuation. There are two type of hidden divergences, bearish and bullish.

Bullish Hidden Divergence appears when the price action makes a higher low while the oscillator moves in the opposite direction making a higher high. Bearish Hidden Divergence is the opposite.

In the same manner, when the oscillator diverges from the prices in an uptrend in a bullish hidden divergence pattern, it means continuation of the uptrend. Some traders believe that the hidden divergence pattern is a far more trading signal than a regular divergence.

It is not difficult to spot these divergence patterns. You can use a Divergence Pattern Recognizer Indicator that can tell you about the appearance of a regular or a hidden divergence. However, keep this in mind that you need indicators to make entry and exit signals. Divergence can only confirm trend reversal or trend continuation.

by: Ahmad Hassam

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