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.

To spot this setup find 2 chart points at which price makes and forms a new swing high or a new swing low but the MACD indicator doesn't, indicating a divergence between price & momentum.

To search for divergence we look for 2 points, 2 highs that form an M-Shape on the Index chart or 2 lows that form a W Shape on the Indices chart. Then look for same M-shape or W-Shape on the Indices indicator you use to trade.

Explanation of a Indices Divergence Trade Setup:

In the chart below we spot two points, point A and point B (swing highs). These 2 points form an M shape on the price chart.

Then using MACD indicator we check highs made by MACD, these are highs that are directly below 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 chart above shows example of one of the 4 types of divergence-setups, the one above is referred to as hidden bearish divergence, one of best type to trade. Types of divergences are discussed in the next lesson.

How to spot divergence

In order to identify Indices diverging 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 as a trader have learned the divergence terms that are used to explain set-up. Let us look at the 2 types of divergences & how to trade these chart setups and patterns.

The two types are:

Classic Indices Trade Divergence
Hidden Indices Trade Divergence

These 2 set-ups are elaborated on following tutorials below

Get More Lessons and Tutorials & Guides:

Trade Stock Indices