Divergence Indices Trading Setups
Divergence Indices Definition - Divergence indices trading is one of the indices trading setups used by Indices traders. Divergence indices trading involves looking at a stock indices chart and one more stock indices indicator. For our divergence trading example we shall use the MACD indices indicator.
To spot this stock indexes trading divergence setup find two chart points at which trading stock indexes price makes a new swing high or a new swing low but the MACD stock indices indicator does not, indicating a stock indexes trading divergence between stock indexes price and momentum.
To look for divergence stock indices signal we look for two chart points, two highs that form an M shape on the stock indices chart or two lows that form a W Shape on the stock indexes trading chart. Then look for the same M shape or W Shape on the Indices indicator that you use to trade - for example RSI stock indices indicator, MACD stock indices indicator or Stochastic Oscillator stock indices indicator.
Example of a Stock Indexes Divergence Trade Setup:
In the stock indices chart below we identify two chart points, point A and point B (swing highs). These two chart points form an M shape on the trading stock indexes price chart.
Then using MACD stock indices indicator we check the highs made by the MACD indices indicator, these are the highs that are directly below Chart points A and B.
We then draw one line on the stock indices chart and another line on the MACD stock indices indicator.
Drawing Divergence Indices Trading Lines - Divergence Indices Trading Strategy - Divergence Indices Trading Entry and Exit
The stock indices chart above shows an example of one of the four types of stock indexes trading divergence setup, the one above is known as hidden bearish indices divergence. Types of stock indexes trading divergence setups are covered in the next learn indices trading lesson.
How to spot divergence indices trading setup
In order to spot Stock Indexes divergence trading signal 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 indices trading terms:
M shapes on indices charts dealing with stock indexes price Highs
W Shapes on indices charts dealing with stock indexes price lows
Example of M Shapes on Stock Indexes Charts
Examples of W Shapes on Stock Indexes Charts
Now that you have learned the divergence indices trading terms that are used to explain divergence trading setup. Let us look at the two types of indices trading divergences and how to trade these indices divergence chart setups.
There two indices divergence types which are:
- Classic Indices Divergence
- Hidden Indices Divergence
These two stock indexes trading divergence setups - classic indices divergence trading and hidden indices divergence trading are explained on the following learn indices trading tutorials in the indices lessons tutorials on this website located at the navigation menu under the topics learn indices trading lessons.