Have you had your fill on learning how to trade divergences?
Let’s review!
Divergence is a popular concept in technical analysis that describes when the price is moving in the opposite direction of a technical indicator.
There are two types of divergences:
- Regular divergence
- Hidden divergence
Each type of divergence will contain either a bullish bias or a bearish bias.
Since you’ve all be studying hard and not been cutting class, we’ve decided to help y’all out (cause we’re nice like that) by giving you a Divergence Trading Cheat Sheet to help you spot regular and hidden divergences quickly.Regular Divergence
Regular divergences signal a possible trend reversal.
| Bias | Price | Oscillator | Description | Example |
|---|---|---|---|---|
| Bullish | Lower Low | Higher Low | Indicates underlying strength. Bears are exhausted. Warning of a possible trend direction change from a downtrend to an uptrend. |  |
| Bearish | Higher High | Lower High | Indicates underlying weakness. The bulls are exhausted. Warning of a possible trend direction change from an uptrend to a downtrend. |  |
Hidden Divergence
Hidden divergences signal a possible trend continuation.
| Bias | Price | Oscillator | Description | Example |
|---|---|---|---|---|
| Bullish | Higher Low | Lower Low | Indicates underlying strength. Good entry or re-entry. This occurs during retracements in an uptrend. Nice to see during the price retest of previous lows. “Buy the dips.” |  |
| Bearish | Lower High | Higher High | Indicates underlying weakness. Found during retracements in a downtrend. Nice to see during price retests of previous highs. “Sell the rallies.” |  |
While divergences can occur between price and any other piece of data, they are most commonly used with technical indicators, especially with momentum oscillators.
Examples of a momentum oscillator include the Commodity Channel Index (CCI), Relative Strength Index (RSI), Stochastic, and Williams %R.
Whew!
That’s quite a lot to remember, isn’t it?
You can write this all down in your palm and look back on it while trading.But if you’re like Eminem whose palms get sweaty, knees weak, and arms get heavy, when you’re nervous, we wouldn’t recommend this.
You can simply bookmark this page and just revisit it when you mix up those higher lows, lower highs, lower lows, and higher highs.
You don’t want to make a wild guess while coming up with a trade, do you?