Indices Divergence Trading SETUPS SUMMARY

Classic Bearish - HH price, LH indicator - Indicates the underlying weakness of a market trend - Warning of a potential reversal in the trend from upward to downwards.

Classic Bullish - LL price, HL indicator - Indicates the underlying weakness of a market trend - Warning of a potential reversal in the trend from downward to upwards.

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

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

Illustrations of the divergence terms:

M shapes dealing with price highs

Index Divergence Setups of M Shapes Index Price Highs and W Shapes Index Price Lows - Divergence Setups

M-shapes

W shapes dealing with price lows

W Shapes trading price lows

W-shapes

These are the shapes to look for when using these set-ups.

One of the best technical indicator for this setup is the MACD - as a stock signal MACD divergence is a setup to enter a trade. But as with any signal there are certain precautions which have to be observed to make this signal a setup. Getting straight in to a trade position as soon as you as a trader see this setup is not the best strategy. This setup should be used in combination with another indicator to confirm the direction of the market trend. A good system to combine with is the MA crossover system.

Be aware this setup on a smaller timeframe isn't so significant. When divergence is seen on a 15 min chart it might or might not be very crucial 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 time-frame, then begin 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 large question is: WHEN? That is why getting straight in to a trade as soon as you see this setup is not always the best trade strategy.

Many investors get caught out by entering the 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 price moves through his stop loss taking him out.

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

What other factors should you consider when using this setup?

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

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

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

2. Reward Risk Ratio: Indices 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 trade positions which have got more profit potential than what you are risking. If you understand how to enter a transaction properly, you as a indices trader can gauge your risk : reward before you open a transaction. That way, you can only choose to open orders which offer a favorable ratio.

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

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