Divergence Setups

Divergence Indices Definition - Divergence indices trading is one of the trading setups used by traders. Divergence indices trading involves looking at a chart & one more indicator. For our divergence example we shall use the MACD indicator.

To spot this stock trade divergence setup find 2 chart points at which price makes a new swing high or a new swing low but MACD indicator does not, indicating a stock trade divergence between price & momentum.

To look for divergence signal we look for two chart points, 2 highs which form an M shape on the chart or two lows that form a WShape on chart. Then look for the same M-shape or WShape on indicator that you use to trade - for examples RSI indicator, MACD indicator or Stochastic Oscillator indicator.

Example of a Divergence Trade Setup:

In the chart below we spot 2 chart points, point A and point B (swing highs). These 2 chart points form an M-shape on price chart.

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

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

Drawing Divergence Indices Lines - Divergence Indices Strategy - Divergence Indices Entry and Exit

The chart above displays example of one of the 4 types of stock trade divergence setup, one above is known as hidden bearish divergence. Types of stock trade divergence setups are discussed in the next learn trading lesson.

How to spot divergence trading setup

In order to spot divergence signal we look for 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 - 2 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 indices trading terms:

M shapes on charts dealing with Stock Indices price Highs

W Shapes on charts dealing with Stock Indices price lows

Example of M Shapes on Charts

Examples of W Shapes on Stock Charts

Now that you've learned the divergence indices trading terms which are used to explain divergence set-up. Let us look at the two types of indices trading divergences and how to trade these divergence chart setups.

The two divergence types which are:

1. Classic Divergence
2. Hidden Divergence

These two stock trade divergence setups - classic divergence trading and hidden divergence trading are described on the following learn guides in the lessons tutorials on this website located at the navigation menu under the topics learn trading lessons.