Classic Bullish CFD Divergence vs Classic Bearish CFDs Trading Divergence
In cfds trading, classic divergence is used as a possible sign for a cfd trend reversal and is used by traders when looking for an area where cfd price could reverse and start going in the opposite direction. For this reason this cfd setup is used as a low risk entry method and also as an accurate way of exit out of a cfd trade transaction.
This trading strategy is a low risk method to sell near the top or buy near the bottom, this makes the risk on your trades are very small relative to the potential reward. However, this is one technique with very many whipsaws & most traders don't recommend using it.
Divergence in Trading is also used to predict the optimum point at which to exit a trade. If you already have an open trade that is already profitable, a good way to identify a profit taking level would be the point where you identify this cfd trading setup.
There are 2 types, based on the direction of the CFD trend:
- Classic Bullish divergence
- Classic Bearish divergence
CFD Classic Bullish Divergence
Classic bullish divergence setup forms when price is forming lower lows (LL), but the oscillator is making higher lows (HL). The example explained and illustrated below shows a picture of this cfd trading setup.
CFDs Classic Bullish Divergence
This example uses MACD indicator as a CFD Trading divergence indicator.
From the above example the cfd price made a lower low(LL) but the indicator made a higher low(HL), this shows there is a divergence between the cfd price and indicator. This signal warns of a possible cfd trend reversal.
Classic bullish diverging trading signal warns of a possible change in the cfd trend from down to up. This is because even though the cfd price went lower the volume of sellers that pushed the cfd price lower was less as illustrated by MACD technical indicator. This indicates underlying weakness of the downwards cfds trend.
Classic bearish CFD Trading Divergence Setup
Classic bearish divergence setup occurs when price is forming a higher high (HH), but the oscillator is lower high (LH). The image below shows an example of the setup.
CFD Classic Bearish Divergence
This example also uses MACD indicator
From the above example the cfd price made a higher high(HH) but the indicator made a Lower High(LH), this shows there is a divergence between the cfd price and indicator. This signal warns of a possible cfd trend reversal.
Classic bearish diverging signal warns of a possible change in the cfd trend from up to down. This is because even though the cfd price went higher the volume of buyers who pushed the cfd price higher was less as illustrated by the MACD indicator. This indicates underlying weakness of the upwards trend.
In the above example, if you as a trader had used divergence to trade you would have gotten good trading signals to enter or exit the trades at an optimal point. However, divergence trading signals just like other indicators, is also prone to whipsaws. That's why it's always good to confirm the diverging trading signals with other indicators such as the RSI, Moving Averages & Stochastic Oscillator.
A good indicator to combine classic diverging setups is the stochastic oscillator & wait for the stochastic lines to move in the direction of the divergence signal so as to confirm the trading signal.
Another good technical indicator to combine with is the moving average technical indicator, in this indicator a trader should use the Moving Average Crossover System
Example of Moving Average Crossover Technique Strategy
Once the divergence trading signal is given, a trader will then wait for the Moving average crossover system to give a trading signal in the same direction, if there is a classic bullish setup, a trader will wait for the moving average system to give an upwards cross-over signal, while for a bearish classic divergence signal the trader should wait for the Moving average cross over system to give a downwards bearish cross-over trading signal.
By combining the classic divergence signals with other indicators this way, a trader will be able to avoid whip-saws when it comes to trading the classic diverging signals, because the trader will wait until the cfd market has actually reversed and is already moving towards this direction, hence the trader will not fall into the trap of picking market tops and bottoms.
