Trade Stock Indices

Divergence Stock Index Trade Setups

Divergence is one of the trade transaction setups and patterns used by the traders. It involves looking at a chart and one more indicator. For our examples we shall use MACD indicator.

Look for two points on the chart where price hits a new high or low. But the MACD does not. That shows a split between price and momentum.

When looking for divergence, we look for two spots, two high points that make an M-Shape on the Index chart or two low points that make a W Shape on the Indices chart. Then, find the same M-shape or W-Shape on the Indices indicator you use for trading.

Explanation of a Indices Divergence Trade Setup:

Look at the chart. It has two points, A and B, both swing highs. They create an M pattern on the price graph.

Next, using the MACD indicator, we examine the peaks achieved by the MACD line, specifically those peaks located directly beneath Chart Points A and B.

We then draw one line on the Indices chart & another line on the MACD indicator.

Divergence Trade Example on MACD Indicator

Drawing Divergence Indices Trade Lines

The picture here gives an example of one of the four kinds of divergence setups: the one here is called hidden bearish divergence, which is one of the best kinds to trade. The different kinds of divergences are talked about in the next part.

How to spot divergence

In order to identify Indices divergence signal we check for the following:

  • HH=Higher High- two highs but last one is higher
  • LH = Lower High - 2 highs but last is lower
  • HL = Higher Low : two lows but last is higher
  • LL = Lower Low - 2 lows but last is lower

First let us look at the explanations of these trading terms:

M shapes dealing with price Highs

Higher High Higher Low Divergence Indices Trade - Divergence & Trade Divergence Setups in Trading

W Shapes dealing with price lows

Higher Low Lower Low Divergence Trade - Explanation Examples of Divergence Setups on Charts

Explanation of M-Shapes

Divergence Indices Trading: How to Spot Divergence Setups in Indices Charts and How to Trade Indices Divergence Trading Setups

Examples of W Shapes

W shapes on a Indices Chart

Now that you know the basic divergence terms traders use, let's dive into the two main types of divergences and how you can spot and trade these setups on the charts.

The two types are:

  1. Classic Indices Trade Divergence

  2. Hidden Indices Trade Divergence

These 2 set-ups are elaborated on following tutorials below

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