Table of contents:
“divergence Trading: Spotting Profitable Reversals In The Australian Market” – Discover professional price action strategies that work so you can profit in bull & bear markets – without indicators, news or opinions
Trading divergence occurs when the direction of your indicator differs from the direction of the market price.
“divergence Trading: Spotting Profitable Reversals In The Australian Market”
The chart can be manipulated in different ways, like looking at your mobile phone which has a smaller screen!
My Chart Patterns Cheatsheet Traders Bulletin
The purpose of the difference cheatsheet is your score to support your judgment; to see chart inconsistencies and determine if buyers or sellers are weakening.
Now we will focus on the types of indicators that you should use when working with the differences cheat sheet.
P.S. If you want to learn how to read price action like a pro, you can check it out.
So now that you have these two pieces of information where the price is making a new high and the indicator is making a new low…
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An oscillator indicator is a tool that creates “waves” or bars that bounce between extreme numbers, such as 0 to 100.
Now I would like to share in depth how it works and the calculation logic…
The principle behind the RSI indicator is that it systematically measures the momentum of both buyers and sellers.
They only use it to call market direction, but never to enter trades!
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Because what’s the point of learning something if you can’t profit from it in the markets, right?
But remember that the difference is the difference between a price direction and an indicator.
The flag pattern will only be valid when the sellers decide to break out again, which also gives us an opportunity to enter:
We’ve dug into the 4-hour time frame to look for the bull flag to time our entries (and also confirm this after multiple confirmations).
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When the price approaches 50 RSI, you can consider taking half of your profit and then taking the rest of the profit if it reaches 30 RSI.
If the price creates a strong candlestick against you (for example, in this case the bull is engulfed), then you stop your trades.
Despite the strategy I shared with you, there are different ways to use the differences to your advantage.
A reversal divergence is when the indicator aims to look for a price momentum mismatch on the chart.
How To Trade An Rsi Divergence
Therefore, I recommend developing your risk management skills using these guides as well:
I showed you not only how the divergence cheatsheet works, but also the principles behind it regarding the dynamics between buyers and sellers.
Can’t wait 4 the “hidden difference” lol..thanks Rayner 4 your teaching you are truly a great teacher… have learned a lot since following you.
Thanks for this lesson on differences, but I’d like you to do another lesson that is strictly about hidden differences.
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He is the most followed trader in Singapore and his blog is read by over 100,000 traders every month…
Please log in again. The login page will open in a new tab. After logging in, you can close it and return to this page. The difference is a trading phenomenon that offers reliable and quality information on trading signals. This applies when the price of the asset moves in the opposite direction to the momentum indicators or oscillators. Commonly used indicators include Relative Strength Index (RSI), Stochastic Oscillator, Awesome Oscillator (AO) and Moving Average Convergence Divergence (MACD).
Divergence is one of the many concepts that experienced traders use to enter or exit the market. To say that a divergence is occurring is to say that price and momentum are out of sync. This indicates that the market is preparing for a trend reversal or pullback, but does not necessarily guarantee trend directions.
1) A regular divergence is when the price signal makes higher highs or lower lows, while the indicator makes lower highs or higher lows, respectively.
Trading Divergences In Forex
2) A hidden divergence, the opposite of a regular divergence, is where the indicator makes higher highs or lower lows, while the price action makes lower highs or higher lows, respectively.
Regular bearish divergences occur when the price action makes successive higher highs while the indicator makes successive lower highs. This indicates that the price of the asset is preparing for a downward transition. The indicator signal means that the pulse is changing. Although price action has made higher highs, the uptrend may be weak. In this scenario, traders should be prepared to short, i.e. sell the asset and later buy it back at a lower price.
A regular bullish divergence occurs when the price action makes progressively lower lows while the indicator makes higher lows. This means that prices will soon move upwards. The action of the indicator means that the price has to reach the signal of the indicator and that the bearish trend is weak. In this scenario, traders should be willing to go long, i.e. buy the asset.
Differences only indicate to traders that the pace of price action is weakening. This does not always lead to a strong reversal, and the price movement can only enter sideways (horizontal price movement in a stable range). Skilled traders combine indicators with various tools to create a more reliable divergence trading strategy. Regular bullish divergence and regular bearish divergence have different entry rules. In any case, once the trader notices the difference, he should consider entering or exiting the market and placing Stop Loss or Take Profit orders.
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Divergences not only indicate a potential trend reversal, but can also be used as a possible sign of trend continuation (price continuing to move in the current direction).
A hidden bullish bias occurs when the price makes a higher low (HL) and the oscillator shows a lower low (LL).
A hidden bearish divergence occurs when the price makes a lower high (LH) and the oscillator makes a higher high (HH).
Note that regular divergences are possible signals of a trend reversal, while hidden divergences indicate a continuation of the trend.
How To Identify And Profit From Conflicting Signals
Trading divergences can be very profitable if traders can confidently spot the divergences using the trading tools in their arsenal. However, like all trading strategies, the use of divergence indicators involves a certain degree of risk.
The information and publications are not intended and should not be construed as financial, investment, trading or other advice or recommendations given or endorsed by . Read more in the terms of use. The Moving Average Convergence Divergence (MACD) indicator is one of the most common tools used by investors and traders to try to spot trend reversals, the holy grail of the markets.
MACD measures the momentum of a stock and can help investors spot changes in that momentum that can reveal price turning points.
Momentum in markets is similar to momentum in the physical world. If you throw a ball in the air, it will rise slower and slower until it changes course and starts to fall. And the same thing happens in the markets.
Divergence Cheat Sheet: Quick Guide (with Examples)
A change in price trends is almost always preceded by a change in momentum, which is perhaps easiest to detect with the MACD indicator.
MACD was developed by Gerald Appel to detect momentum by measuring the relationship between two exponential moving averages (the indicator defaults to the 12-day and 26-day averages).
To confirm the momentum change, the nine-day exponential moving average is added as a signal line (red line in Figure 1). Roughly speaking, a buy signal occurs when the MACD line crosses above the signal line, and a sell signal occurs when the MACD line falls below the signal line. When trying to optimize these signals, it was found that 12 and 26 day moving averages for long term signals and seven and 18 day moving averages for short term signals were ideal.
The practice of drawing trend lines on a stock chart is as old as stock charts themselves. But you might not know that you can also draw trend lines on indicators like the two-line MACD. Drawing support and resistance levels creates an action channel that gives a clearer picture of the momentum of the trend.
Understanding Divergences For Crypto Trading
If two moving averages diverge, then the momentum increases, and if they converge, then the momentum weakens. The distance between the two is represented by the so-called MACD line, as seen in black in Figure 1.
In Figure 2, we measured the strength of a stock’s trend by creating a channel. To create a channel, pull the support by connecting the bottoms and determine the retracement line by connecting the MACD tops.
In November 2008 and then in February 2009, the MACD made lower highs while the stock price made the same highs; this is called a divergence and tells investors that the stock is losing momentum. Investors could go short when the MACD line bounces off resistance. The short position can be covered when the MACD line reaches support at the bottom of the channel or long trades when the channel is broken, as it was near the end.
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