DIVERGENCE TRADING SETUPS SUMMARY
Classic Bearish - HH indices price, LH indicator - Indicates underlying weakness of a indices trend - Warning of a possible change in the indices trend from up to down.
Classic Bullish - LL indices price, HL indicator - Indicates underlying weakness of a indices trend - Warning of a possible change in the indices trend from down to up.
Hidden Bearish - LH indices price, HH indicator - Indicates underlying strength of a indices trend - Mainly found during corrective rallies in a downward indices trend.
Hidden Bullish - HL indices price, LL indicator - Indicates underlying strength of a indices trend - Occurs mainly during corrective declines in an upward indices trend.
Illustrations of the divergence terms:
M-shapes dealing with stock indexes price highs
W-shapes dealing with stock indexes price lows
These are the shapes to look for when looking for when using these indices trading setups.
One of the best indicator for this stock indexes trading setup is the MACD Indices Indicator - as a stock indices signal MACD divergence is a setup to enter a trade. But as with any signal there are certain precautions that have to be observed to make this stock indices signal a setup. Getting straight in to a trade as soon as you see this stock indexes trading setup is not the best strategy. This setup should be used in combination with another technical indicator to confirm the direction of the indices trend. A good system to combine with is the moving average crossover system.
Be aware this stock indexes trading setup on a smaller time frame is not so significant. When divergence is seen on a 15 minute chart it may or may not be very important as compared to the 4 hour chart time frame on MT4 stock indexes trading platform.
If seen on a 60 minute chart, 4 hour chart, or daily chart time frame, then start looking for other factors to indicate when the stock indexes price may react to the divergence.
This brings us to a key point when using this stock indices signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in stock indexes price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this stock indexes trading setup is not always the best strategy.
Many investors get caught out by entering the stock indexes trading market too soon when they see MACD divergence. In many cases, stock indexes price has still got some momentum to continue in the current direction. The investor who has jumped in too soon can only stare at the screen in dismay as stock indexes price shoots through his stop loss taking him out.
If you simply look for this stock indexes 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 indices trading setup?
1. Support, Resistance and Fibonacci levels on higher time frames
Another way to greatly increase the odds of a winning trade is to observe the higher chart time frames before opening an order based on the lower time frames.
If you observe that the hourly, 4 hour or daily Indices chart has met a major resistance, support or Fibonacci level then the probability of a successful trade based on divergence on a lower time frame at this point increases.
2. Reward to risk ratio
And finally, when looking for divergence, it is very important that you enter the trade correctly, so that you have a good risk/reward ratio and only open indices trading transactions 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 choose to open orders that offer a favorable ratio.
Finally, when used correctly and combined with other technical indicators to confirm this indices trading signal, divergence setup can offer huge profit potential.