Stochastic Oscillator Divergence Technical Indicator Indices Trading

Divergence trading is one of the indices signals that can be generated when using the divergence indicator stochastic oscillator.

Divergence on stochastic indicator is a signal that a rally or retracement is losing steam and is likely to reverse. It means that the last buyers or last sellers are pushing the stock indices trading price in one way while the majority of other traders have stopped trading in that way and are cautious of a indices price correction or retracement.

There are 4 types of divergence trading setups which can be traded using this divergence indicator.

Example 1: Stock Indices Trading Classic Bullish Divergence

A Bullish Divergence in stochastic indicator and the stock indices trading price is followed by a rise in indices trading price.

stochastic divergence technical indicator

When the stock indices trading price is making new lows the stochastic divergence indicator is not moving past its previous lows it is an indication that the down indices trend is about to reverse & a bullish rally is likely to occur.

In the stock indices trading example above the stock indices trading price set a new low but it was not coupled with a new low in the measure of Stochastic, when stock indices trading price formed a new low then the indicator should have followed suit, but the stochastic did not therefore the divergence setup.

This divergence trading setup is even stronger because there is combination of a divergence & then followed by a rise above the 20% level. This combines the Over-bought & Oversold levels.

Example 2: Indices Trading Classic Bearish Divergence

A Bearish Divergence in stochastic indicator & the stock indices trading price is followed by a drop in indices trading price.

stochastic divergence technical indicator

When stock indices trading price is making new highs but the stochastic divergence indicator is not moving beyond its previous high it is an indication the up indices trend will reverse & that a bearish divergence will follow.

This setup is even stronger because there is a combination of a divergence set-up with a dip below the overbought 80 level.

Example 3: Stock Indices Hidden Bullish Divergence

This stochastic divergence indicator setup signifies a retracement in an upwards trend. This is the best type of divergence to trade, because you are not trading a indices price trend reversal, but you're trading within the direction of the Indices market trend.

stochastic divergence technical indicator

Even though, the stochastic oscillator stochastic divergence indicator made a lower low the stock indices trading price low was higher than the previous low (higher low). This means that even though the sellers made a good attempt to push stock indices trading price down as indicated by the stochastic divergence indicator, this was not reflected on the indices trading price, and the stock indices trading price did not make a new low. This is the best place to buy indices, since it is even in an upward indices trend there's no need to wait for a confirmation trading signal, because you are buying in an upward Indices market trend.

Example 4: Indices Trading Hidden Bearish Divergence

This setup signifies a retracement in a downwards trend.

stochastic divergence technical indicator

This is the best type of divergence to trade with this stochastic divergence indicator, because you are not trading a indices price trend reversal, but you're trading within the direction of the market trend. This is the best place to sell indices, since it is even in a down indices trend there's no need to wait for a confirmation trading signal, because you are selling in a downwards Indices trend.