Indices Trading Divergence Trading SETUPS SUMMARY
Indices Classic Bearish Divergence Setup - HH price, LH indicator - Indicates the underlying weakness of a trend - Warning of a possible change in the trend from up to down.
Indices Trading Classic Bullish Divergence - LL price, HL indicator - Indicates the underlying weakness of a trend - Warning of a possible change in the trend from down to up.
Stock Hidden Bearish Divergence Pattern - LH price, HH indicator - Indicates the underlying strength of a trend - Mainly found during corrective rallies in a downwards trend.
Indices Hidden Bullish Divergence Pattern - HL price, LL indicator - Indicates the underlying strength of a trend - Occurs mainly during corrective declines in an upward trend.
Divergence Forum - Illustrations of the divergence terms:
M-shapes dealing with Stock Indices price highs
M-shapes - Divergence Forum
W-shapes dealing with Indices price lows
W-shapes - Divergence Forum
These are the divergence shapes to look for when using these setups.
One of the best stock indicator for this stock trading setup is the MACD Technical Indicator - 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 stock trading signal a setup. Getting straight in to a trade position as soon as you see this stock trading setup is not the best strategy. This setup should be used in combination with another stock indicator to confirm the direction of the trend. A good system to combine with is the Moving Average crossover system.
Be aware this setup on a smaller time-frame is not so significant. When divergence is seen on a 15 min chart it may or might not be very important as compared to the 4 hour chart timeframe on MT4 software.
If divergence setup 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 price might react to the divergence.
This brings us to a key point when using this divergence setup signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this stock trading setup is not always the best strategy.
Many traders get caught out by entering the stock trading market too soon when they see the MACD divergence setup. In many cases, 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 stock price shoots through his stoploss taking him out.
If you simply look for this divergence setup without any other considerations you will not be aligning yourself with the best odds, so to increase the chances of making a successful trade you should also look at other factors, specifically other stock indicators.
What other factors should you consider when using this trading setup?
1. Support level, Resistance levels and Indices Trading Fib levels on higher Chart Timeframes
Another way to significantly increase the odds of a winning trade is to observe the higher chart timeframes before opening an order based on the lower timeframes.
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 timeframe at this point increases.
2. Reward:Risk Ratio: Indices Trading Money Management Principles
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 trades which have more profit potential than what you're risking. If you understand how to enter a trade properly, you can measure your risk/reward before you open a trade. 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 signal, divergence setup can provide for a huge profit potential.
