Divergence Trade - Market Strategies

Divergence trading is one of the trade transaction patterns used by the traders. It involves looking at a chart & one more indicator. For our example we shall use MACD indicator.

To spot this divergence trading setup find 2 chart points at which price makes and forms a new swing high or a new swing low but the MACD does not, indicating a divergence between price and momentum.

To search for divergence trading pattern we look for 2 chart points, 2 highs which form an M-shape on the chart or 2 lows that form a W Shape on the trading chart. Then look for same M-shape or W-Shape on chart indicator you use to trade.

Explanation of a Divergence Trading Setup:

In the EURUSD currency chart below we spot two chart points, point A and point B (swing highs). These 2 points form an M-Shape on the price chart.

Then using MACD we check and analyze highs formed by the MACD, these are the highs that are directly below the Chart points A & B.

We then draw one line on the FX currency chart & another line on the MACD indicator.

Divergence Trade Example on MACD - Divergence Strategy Trading Setups - MACD Divergence Strategy PDF

Drawing Divergence Lines - Divergence Trading Market Trading Strategies

The chart above portrays example of one of the 4 types of divergences trading setups, the one above is referred to as hidden bearish divergence trade setup.

How to spot divergence trading setups

In order to identify divergence trade setup we look for the following:

HH = Higher High - 2 highs but the last is higher
LH = Lower High - 2 highs but last one is lower
HL=Higher Low : two lows but the last is higher
LL = Lower Low - two lows but the last is lower

First let us look at the illustrations/explanations of the divergence trading terms:

M-shapes for price Highs

Divergence Strategy Setups - How Do I Trade Divergence on Chart Setups

Divergence Market Trading Strategies

W-Shapes for price lows

Divergence Trader Strategy - Divergence Setups Examples Tutorial

Divergence Market Strategies

Explanation of M Shapes

Divergence Trader Strategies - Divergence Strategies Guides PDF

Divergence Trading Market Strategies

Examples of W-Shapes

Spotting Divergence Strategies - How to Identify Divergence Trading Setups