Classic Bullish and Bearish Divergence PDF

indices classic divergence is used as a possible signal for a trend reversal and is used by stock traders to analyze stock price movement and identify areas where the stock price could reverse & start going in the opposite direction. classic divergence setup is used as a low risk entry method when opening a trade or when exiting a trade.

Classic divergence strategy is a low risk technique to sell near the stock trading market tops or buy near the stock trading market bottom, this makes the trading risk on your trades are to be small relative to the potential reward. However, this classic divergence strategy is one technique with very many whipsaws & most traders do not recommend using it.

Divergence in Indices is also used to predict the optimum point at which to exit an open trade. If you already have an open trade that's already profitable, a good method to identify a profit taking level would be to use the point where you spot this divergence trade setup.

There are two types of classic divergence, based on the direction of the current trend:

1. Stock Classic Bullish Divergence
2. Indices Classic Bearish Divergence

Indices Divergence Scanner

Indices classic bullish divergence forms when price is making lower lows ( LL ), but the indicator is making higher lows (HL). The divergence example explained and illustrated below shows classic divergence setup.

Stock Divergence Scanner - Classic Divergence Scanner

This stock divergence example uses MACD indicator as a stock trade divergence indicator.

From the above divergence scanner example the stock price made a lower low(LL) but the MACD indicator made a higher low(HL), this highlights there's a divergence between the stock price and the MACD indicator. This divergence signal warns of a possible trend reversal.

Classic bullish divergence stock signal warns of a possible reversal in the trend from downward trend to upward trend - because even though the stock price went lower the volume of sellers that moved the stock price lower was less as shown by the MACD technical indicator. This divergence signal indicates underlying weakness of the downward trend.

Stock Divergence Scanner

Indices classic bearish divergence forms when price is making a higher high ( HH ), but the indicator is forming a lower high (LH). The divergence scanner example explained and illustrated below shows an example of the classic bearish divergence trade setup.

Stock Divergence Scanner - Classic Divergence Scanner

This divergence scanner example also uses MACD indicator

From the above example the stock price made a higher high(HH) but the MACD indicator made a Lower High(LH), this shows there is divergence between the stock price and the MACD indicator. This divergence signal warns of a possible trend reversal.

Classic bearish divergence signal warns of a possible reversal in the trend from upward trend to downwards trend - this is because even though the stock price went higher the volume of buyers that pushed the stock price higher was less as shown by the MACD indicator. This signals underlying weakness of the upward trend.

In the above example, if as a trader you had used divergence trade setup to trade you would have gotten good signals to enter or exit the trades at an optimal point. However, divergence signals just like other stock indicators, is also prone to whipsaws. That is why it's always good for traders using this stock trading setup to confirm the divergence signals with other indicators such as RSI, Stochastic Oscillator & Moving Averages.

An good indicator to combine divergence stock trading signal with is the moving average technical indicator, in this moving average indicator a trader should use the Moving Average Cross Over System - Moving Average Cross Over System & Divergence Trading

Example of Moving Average Cross Over Strategy

Once the divergence signal is given, a trader will then wait for the Moving average crossover stock system to give a stock signal in the same direction of the divergence signal, if there is a classic bullish divergence signal, a trader will wait for the MA cross-over strategy to give an upward crossover signal, while for a bearish classic divergence stock signal the trader will wait for the Moving average crossover strategy to give a downward bearish crossover indices trade signal.

By combining the classic divergence trading signals with other technical indicators this way, a trader will be able to avoid whipsaws when it comes to trading the classic divergence signals, because the trader will wait until the trend has actually reversed & is already moving toward the direction of the divergence trade setup, hence the trader will not fall into the trap of picking market tops & market bottoms.