Indices Trading Divergence Stock Indices Trading SETUPS SUMMARY

Classic Bearish - HH trading price, LH indicator - Indicates the underlying weakness of a trend - Warning of a possible change in the trend from up to down.

Classic Bullish - LL trading price, HL indicator - Indicates the underlying weakness of a trend - Warning of a possible change in the trend from down to up.

Hidden Bearish - LH trading price, HH indicator - Indicates the underlying strength of a trend - Mainly found during corrective rallies in a down-wards trend.

Hidden Bullish - HL trading price, LL indicator - Indicates the underlying strength of a trend - Occurs mainly during corrective declines in an upward trend.

Illustrations of the divergence terms:

M-shapes dealing with price highs

M-shapes

W-shapes dealing with price lows

W-shapes

These are the shapes to look for when using these trading setups.

One of the best indicator for this trading setup is the MACD Indicator - as a stock signal MACD divergence is a setup to enter a trade. But as with any trading signal there are certain precautions which have to be observed to make this signal a set-up. Getting straight in to a trade as soon as you see this trading setup isn't the best strategy. This setup should be used in combination with another indicator to confirm the direction of the trend. A good system to combine with is the moving average cross-over system.

Be aware this trading setup on a smaller timeframe is not so significant. When divergence is seen on a 15 min chart it might or might not be very important as compared to the 4 hour chart time frame on MetaTrader 4 platform.

If seen on a 60 minute chart, 4 hour chart, or daily chart timeframe, then start looking for other factors to indicate when the price may react to the divergence.

This brings us to a key point when using this signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in trading price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this stock indices setup isn't always the best strategy.

Many investors get caught out by entering the trading market too soon when they see MACD divergence. In many cases, stock trading price has still got some momentum to continue in current direction. The investor who has jumped in too soon can only stare at screen in dismay as trading price shoots through his stop loss taking him out.

If you simply look for this trading setup without any other considerations you will not be aligning yourself with the best odds, so to increase the odds of making a successful trade you should also look at other factors, specifically other indicators.

What other factors should you consider when using this trading setup?

1. Support level, Resistance levels & Indices Trading Fib levels on higher Indices Chart Time Frames

Another way to significantly increase the odds of a winning trade is to observe the higher chart time frames before opening an order based on the lower timeframes.

If you observe that the hourly, 4 hour or daily chart has met a major resistance, support or Fib level then the probability of a successful trade based on divergence on a lower timeframe at this point increases.

2. Reward to Risk Ratio: Indices Trading Money Management Rules

And finally, when looking for divergence, it's very important that you enter the trade correctly, so that you have a good risk/reward ratio & only open trades that have more profit potential than what you are risking. If you understand how to enter a transaction properly, you can measure your risk/reward before you open a transaction. That way, you can only select to open orders which offer a favorable ratio.

Finally, when used correctly and combined with other indicators to confirm this trading signal, divergence setup can provides for a huge profit potential.