Stochastic Oscillator Bullish Stock Index Divergence and Bearish Divergence Trading
Divergence Indices trading is one of the Indices signals that can be derived & generated when using stochastic oscillator trading indicator.
Divergence Indices trading is a signal that a rally or retracement is losing steam & is likely to reverse. It means that the last buyers or the last sellers are pushing the Indices price in one way while the majority of other Index traders have stopped trading in that direction & are cautious of a Indices price correction or retracement.
There are 4 types of Index divergence setups
Example 1: Classic Indices Bullish Divergence Setup
A Indices Classic Bullish Divergence in the stochastic oscillator indicator and the Indices price is followed by a rise in price.
Stochastic Oscillator Classic Indices Bullish Divergence
When the Indices price is making new lows the Stochastic is not surpassing its previous lows it is an indication that the downward trend is about to turn and reverse & a bullish Stock Index rally is likely to occur.
In the Indices above example the Indices price set a new low but it was not coupled and accompanied with a new low in the measure of the Stochastic oscillator indicator, when price formed a new low then the stochastic indicator should have followed suit, but the stochastic indicator did not therefore the Index classic divergence setup.
Index classic divergence setup is even stronger because there is combination of a divergence Indices trade setup and then followed by a rise above the 20% indicator level. This combines the Overbought and Oversold levels with this Stock divergence setup.
Example 2: Classic Indices Bearish Divergence Setup
A Classic Indices Bearish Divergence setup in the stochastic oscillator indicator and the Indices price is followed by a drop in price.
Stochastic Oscillator Classic Indices Bearish Divergence
When price is making new highs but the Stochastic oscillator indicator is not moving beyond its previous high it's an indication the upwards trend will reverse & that a Indices bearish divergence trade setup will follow.
This classic Index bearish divergence setup is even stronger because there's a combination of a Stock Index divergence with a dip below the over-bought 80 level.
Example 3: Hidden Indices Bullish Divergence Setup
Hidden Indices Bullish Divergence trade setup signifies a retracement in an upward market trend. This Index hidden divergence trading setup is the best type of Index divergence setup to trade, because you're not trading a Indices price reversal, but you are trading within the direction of the market trend.
Stochastic Oscillator Hidden Indices Bullish Divergence
Even though, stochastic oscillator indicator made a lower low the Indices price low was higher than previous low (higher low). This means that even though the Indices sellers made a good attempt to push Index price down as indicated by the stochastic indicator, this was not reflected on the Indices price, and the price did not make a new low. This is the best place to open a buy Index trade, since it is even in an upward trend there is no need for you to chill and wait for a confirmation trading signal, because you're buying in an upward trend.
Example 4: Hidden Indices Bearish Divergence Setup
Hidden Indices Bearish Divergence setup signifies a retracement in a downwards trend.
Stochastic Oscillator Hidden Indices Bearish Divergence
Hidden Indices bearish divergence Stock Index setup is the best type of divergence to trade, because you're not trading a Indices price trend reversal, but you are trading within the market direction of the market price trend. This is the best place to open a sell position, since it is even in a downwards trend there is no need for you to chill and wait for a confirmation trading signal, because you are selling in a downwards trend.
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