Index 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 downward.

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 power of a market trend - Mainly found during the corrective rallies in a down-ward trend.

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

Description and illustration of the divergence trading setup terms:

M shapes dealing with price highs

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

M-shapes

W shapes dealing with price lows

W Shapes trading price lows

W-shapes

These are the shapes to look out for when using these patterns.

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

Be aware this 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 crucial as compared to the 4 H chart time frame on MetaTrader 4 software.

If seen on a 60 minute chart, 4 H chart, or daily chart time frame, then begin looking for other factors to indicate when price may react to the divergence.

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

Most traders get caught up by entering into the market too soon when they spot MACD divergence setup. In many cases, stock trading price has still got some momentum to continue in present direction. The investor and trader who has opened a trade too soon can only stare at the screen in dismay as the price moves through his stoploss order taking him out.

If you simply look for this setup without any other considerations you will not be aligning yourself with the best chances, so to increase odds and chances of executing 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 Fibo levels on higher Chart Time Frames

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

If you look at the hourly, 4 H or daily chart has got to a major resistance, support or Fibo level then the probability of a successful trade based on the divergence on a lower timeframe at this point increases.

2. Risk : Reward Ratio: Indices Money Management Guidelines

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

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

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