Stochastic Oscillator Divergence Technical Indicator Commodity Trading

Divergence trading is one of the commodity trading signals that can be generated when using the divergence indicator stochastic oscillator.

Divergence on stochastic indicator is a signal that a rally or retracement is losing steam & is likely to reverse. It means that the last buyers or the last sellers are pushing the commodity price in one way while majority of other traders have stopped trading in that way & are cautious of a commodity price correction or retracement.

There are four types of divergence setups which can be traded using this divergence technical indicator.

Example 1: Commodity Classic Bullish Divergence

A Bullish Divergence in the stochastic indicator & the commodity price is followed by a rise in commodity price.

stochastic divergence technical indicator

When the commodity price is making new lows the stochastic divergence indicator is not moving past its previous lows it is an indication that the down commodity trend is about to reverse & a bullish rally is likely to occur.

In the commodities trading example above the commodity price set a new low but it was not coupled with a new low in the measure of Stochastic, when price formed a new low then the indicator should have followed suit, but the stochastic did not therefore the divergence setup.

This divergence setup is even stronger because there is combination of a divergence and then followed by a rise above the 20% level. This combines the Overbought and Oversold levels.

Example 2: Commodities Classic Bearish Divergence

A Bearish Divergence in the stochastic indicator & the commodity price is followed by a drop in commodity price.

stochastic divergence technical indicator

When commodity price is making new highs but the stochastic divergence indicator is not moving beyond its previous high it is an indication the up commodity trend will reverse & that a bearish divergence will follow.

This set-up is even stronger because there is a combination of a divergence set-up with a dip below the over bought 80 level.

Example 3: Commodity Trading Hidden Bullish Divergence

This stochastic divergence indicator setup signifies a retracement in an upward trend. This is the best type of divergence to trade, because you are not trading a commodity price trend reversal, but you are trading within the direction of the Commodity Trading market trend.

stochastic divergence technical indicator

Even though, the stochastic oscillator stochastic divergence indicator made a lower low the commodity price low was higher than the previous low (higher low). This means that even though the sellers made a good attempt to push commodity price down as indicated by the stochastic divergence indicator, this was not reflected on the commodity price, and the commodity price did not make a new low. This is the best place to buy commodity, since it is even in an upward commodity trend there is no need to wait for a confirmation signal, because you are buying in an upward Commodity Trading market trend.

Example 4: Commodities Hidden Bearish Divergence

This setup signifies a retracement in a downwards trend.

stochastic divergence technical indicator

This is the best type of divergence to trade with this stochastic divergence indicator, because you're not trading a commodity price trend reversal, but you are trading within the direction of the market trend. This is the best place to sell commodity, since it is even in a down commodity trend there is no need to wait for a confirmation signal, because you're selling in a downwards Commodity Trading trend.