Indices Trading Divergence Stock Indices Trading SETUPS SUMMARY
Indices Classic Bearish Divergence - 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.
Indices Trading Classic Bullish Divergence - 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.
Stock Indices Trading Hidden Bearish Divergence - LH indices price, HH indicator - Indicates underlying strength of a indices trend - Mainly found during corrective rallies in a downwards trend.
Indices Trading Hidden Bullish Divergence - HL indices price, LL indicator - Indicates underlying strength of a indices trend - Occurs mainly during corrective declines in an upward indices 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 indices trading setups.
One of the best stock indices indicator for this stock indices trading setup is the MACD Technical Indicator - as a stock indices signal MACD divergence is a setup to enter a indices trade. But as with any signal there are certain precautions which have to be observed to make this stock indices trading signal a setup. Getting straight in to a trade as soon as you see this stock indices trading setup is not the best strategy. This setup should be used in combination with another stock indices technical indicator to confirm the direction of the trend. A good system to combine with is the moving average cross over system.
Be aware this stock indices setup on a smaller timeframe isn't 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 MetaTrader 4 software.
If divergence setup seen on a 60 minute chart, 4 hour chart, or daily chart timeframe, then start looking for other factors to indicate when the stock indices price may 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 stock indices price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this stock indices trading setup is not always the best strategy.
Many indices traders get caught out by entering the stock indices trading market too soon when they see MACD divergence. In many cases, stock indices 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 indices price shoots through his stop-loss taking him out.
If you simply look for this divergence 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 stock indices indicators.
What other factors should you consider when using this Stock Indices trading setup?
1. Support level, Resistance levels & Indices Trading Fib levels on higher Indices Chart Time Frames
Another way to significantly increase the odds of a winning trade is to observe the higher chart time-frames 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 to Risk Ratio: Indices Trading 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 indices 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 transaction. That way, you can only choose to open orders which offer a favorable ratio.
Finally, when used correctly and combined with other indices technical indicators to confirm this indices trading signal, divergence setup can provide for a huge profit potential.
