Table of Contents
1. Introduction
The wide acceptance and promotion of divergence trading theories prove they can be devastating in the right hands. Users boast impressive results on a good day, catching reversals at their tops and bottoms. However, every interested newbie will uncover a few caveats when delving deeper into this strategy.
Continue reading this article to learn essential rules for trading divergence profitably in any financial market. As a bonus, readers will enjoy easy access to a groundbreaking discovery that exploits the approach unbelievably.
2. Identify Reliable Oscillators
It’s a no-brainer. Divergence theories depend on the disparity between an asset’s price moves and an oscillator. If there is no periodic but genuine inconsistency, there is no opportunity.
Thus, interested traders must seek only the best oscillators to harness this strategy satisfactorily.
The most well-known indicators over the years include the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD).
Formation of a higher high or lower low on one of the entities (price or oscillator), and not both, is typically the reversal signal.
The Divergence Solution indicator is another highly recommended option for a more automated approach.
3. Clarify the Price-Indicator or Price-Price Relationships
As discussed in the more extensive guide, Unlocking the Power of Divergence in Trend Reversals, a divergence can be between two markets or a market and an indicator.
Whatever the paired entity may be, a trader must extensively clarify their relationship.
Price-oscillator pairs typically connect directly, and relatively higher/lower swing highs/lows appear simultaneously (except during a divergence).
However, price-price relationships are not always direct.
For example, the U.S. Dollar Index (DXY) and the EUR/USD have an inverse relationship. That means a higher high on the index appears as a lower low on the forex pair (except during a divergence).
Understanding this connection will prevent potentially costly surprises.
4. Master the Expectations for a Trade Opportunity
What should a bearish opportunity look like? Can divergence give false signals? How do experienced traders verify its reliability?
Divergence trading can be relatively straightforward, but every new trader must grasp the essential criteria for a trade opportunity.
Hence, pros recommend comprehensive backtesting and forward testing.
Usually, the main requirement in this strategy is the disharmony between relative swing highs or lows. The price may form a higher/lower one as the oscillator fails to replicate it.
However, identifying it in live conditions with other factors may prove challenging if not properly mastered.
5. Establish a Clear Trading Time Frame
Divergence trading is a universal strategy that works effectively in all time frames.
Whether one prefers to scalp, position trade, or swing trade, the approach is similar and only demands switching to a more appropriate period on the trading platform.
Therefore, setting a clear trading time frame will prevent confusion that can produce losses.
For example, if the divergence is between two markets, both must be in the same time frame to reveal the relative highs and lows.
6. Use More Confluences for Entries & Exits
A divergence will only hint at a potential reversal (bullish or bearish) in any applied market or time frame. However, users need more data for precise entries, exits, and risk management.
The classical chart and candlestick patterns have become the go-to methods for some.
Head & Shoulders, Double Top, and Double Bottom are examples of reversal chart patterns. Inverted Hammer, Shooting Star, and Evening Star are signaling candlestick shapes.
For risk management, various detailed strategies feature take profit and stop orders, position size calculations, and risk-to-reward ratio assessments.
A fundamental divergence signal can be the gateway, but traders must do more to ensure successful trades
7. Avoid Trading Against Strong Trends
Remember, divergence trading is a reversal strategy. Traders expect that any underlying trend has reached its apex or base, and the market is ready for a significant turnaround.
Thus, professionals strongly advise against engaging the markets during strong trends.
The chances for a considerable reversal are lower, and trades are typically unsuccessful during these periods.
One can easily assess the strength of a trend by visual inspection. A strong uptrend will see the market break swing highs quickly and with momentum, and a heavily bearish market will move downwards swiftly.
8. Streamlining Divergence Trading with an Unprecedented Technical Tool
Divergence trading can be one of the most dependable profitability techniques with an excellent oscillator. Hence, traders are pressured to make the perfect choice among the hundreds of options.
One of the leading lesser-known oscillators is the Divergence Solution for TradingView.
Its triple confirmation algorithm presents the best divergence opportunities in any market or time frame applied. Every user enjoys the near-automated trading solution due to its bonus application in risk management.
In short, here are some benefits of the groundbreaking indicator:
- Ability to spot divergences several moments before other traders with little to no effort
- Knowledge of the best risk management practices per trade
- Freedom to explore several financial markets
- Liberty to day trade, scalp, or position trade with ease
- Assurance of taking every opportunity, credit to the tool’s reliable alert system
Sounds unreal? Take your divergence trading to the next level by clicking here today! The results are mind-blowing.
9. Summary
Divergence trading is worth every time and effort to learn. Profitable subscribers to the theory believe the following tips will help every newbie find their feet:
- Discovery of reliable oscillators
- Clarification of the price-indicator or price-price relationships
- Establishment of a clear trading time frame
- Mastering what a perfect divergence signal looks like
- Utilization of more confluences for entries, exits, and risk management
- Abstinence from strongly trending markets
As for the oscillator choice, only a few come close to Indicator Vault’s Divergence Solution for TradingView. It improves traders’ experience in many ways comparable to an automated system.
Please share this post in every trading circle for increased insights into divergence trading. Also, leave a comment below for eye-opening tips from experts.
