Divergence Commodity Trading Setups
Divergence is one of the trade setups used by Commodity traders. It involves looking at a commodity chart and one more indicator. For our example we shall use the MACD technical indicator.
To spot this trading setup find two chart points at which commodity price makes a new swing high or a new swing low but the MACD indicator does not, indicating a divergence between commodity price & momentum.
To look for divergence we look for two chart points, two highs that form an M-shape on the Commodities Trading chart or two lows that form a W-Shape on Commodity Trading chart. Then look for same M-shape or W-Shape on Commodity Trading indicator you use to trade.
Example of a Commodities Trading Divergence Trade Setup:
In the commodity chart below we identify 2 chart points, point A & point B (swing highs). These 2 points form an M-shape on the commodity price chart.
Then using MACD indicator we check the highs made by the MACD, these are the highs that are directly below Chart points A & B.
We then draw one line on the Commodities Trading chart & another line on the MACD indicator.
Drawing Divergence Commodity Trading Lines
The chart above shows example of one of the 4 types of divergences, the one above is known as hidden bearish divergence, one of the best type to trade. Types of divergences are covered in the next tutorial.
How to spot divergence
In order to spot Commodity Trading diverging signal we look for the following:
- HH=Higher High- 2 highs but the last one is higher
- LH= Lower High- two highs but the last one is lower
- HL=Higher Low- two lows but the last one is higher
- LL= Lower Low- two lows but the last one is lower
First let us look at the illustrations of these trading terms:
M-shapes dealing with Commodities price Highs
W-Shapes dealing with Commodity price lows
Example of M Shapes
Examples of W Shapes
Now that you've learned the divergence trading terms that are used to explain set-up. Let us look at the 2 types of divergences and how to trade these chart setups.
There two types are:
- Classic Commodity Trading Divergence
- Hidden Commodities Trading Divergence
These 2 setups are explained on the following guides below
