Trade Stock Indices

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Divergence Trader Strategies

Divergence Trader Strategies is one of the trade setups used by Indices traders. It involves looking at a stock indices chart and one more stock indices indicator. For our example we shall use the MACD indicator.


To spot this divergence trader strategies find two chart points at which stock indexes price makes a new swing high or a new swing low but the MACD indicator does not, indicating a divergence between stock indexes price and momentum.


To look for Divergence trader strategies we look for two chart points, two highs that form an M-shape on the Stock Indexes chart or two lows that form a W-Shape on the Indices chart. Then look for the same M-shape or W-Shape on the Indices indicator you use to trade.


Example of a Indices Divergence Trade Strategies:

In the Indices chart below we identify two chart points, point A and point B (swing highs). These two points form an M-shape on the stock indexes price chart.


Then using MACD indicator we check the highs made by the MACD, these are the highs that are directly below Chart points A and B.


We then draw one line on the Stock Indexes chart and another line on the MACD indicator.

Stock Indexes Divergence Trade Example on MACD Indices Indicator

Drawing Divergence Indices Trading Lines - Divergence trader strategies


The Stock Indexes chart above shows an example of one of the four types of divergence trader strategies, the one above is known as hidden bearish divergence strategy, one of the best type to trade.


How to spot divergence trader strategies

In order to spot Indices Divergence trader strategies we look for the following:


  • HH=Higher High- two highs but the last one is higher

  • LH= Lower High- two highs but the last one is lower

  • HL=Higher Low- two lows but the last one is higher

  • LL= Lower Low- two lows but the last one is lower


First let us look at the illustrations of these divergence setup trading terms:


M-shapes dealing with stock indexes price Highs

Higher High Higher Low Divergence Indices Trading

Divergence trader strategies


W-Shapes dealing with stock indexes price lows

Higher Low Lower Low Divergence Indices Trading

Divergence trader strategies


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Example of M Shapes

M shapes on a Indices Trading Chart

Divergence trader strategies


Examples of W Shapes

W shapes on a Indices Trading Chart

Divergence trader strategies


Now that you have learned the Divergence trader strategies terms that are used to explain trading setup. Let us look at the two types of Indices divergences and how to trade these divergence trader strategies setups.


There two types are:


  1. Classic divergence trader strategies


  2. Hidden divergence trader strategies


These two setups are the most commonly used divergence trader strategies and these are explained on the indices trading strategies section of this website.

 

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