Stochastic Oscillator Bullish Divergence and Bearish Divergence Trading
Divergence Indices trading is one of the Indices signals that can be derived & generated when using stochastic oscillator indicator.
Divergence Indices trading is a signal that a rally or retracement is losing steam and is likely to reverse. It means that last buyers or last sellers are pushing Indices price in one way while majority of other Indices traders have stopped trading in that direction and are cautious of a Indices price correction or pull back.
There are 4 types of Indices divergence setups
Example 1: Classic Indices Bullish Divergence Setup
A Indices Classic Bullish Divergence in the stochastic oscillator indicator and the Indices price is followed by a rise in Indices price.
Stochastic Indicator Classic Indices Bullish Divergence
When the Indices price is making new lows the Stochastic Indices indicator is not surpassing its previous lows it is an indication that the downward Indices trend is about to turn and reverse & a bullish rally is likely to occur.
In the Indices example above the Indices price set a new low but it was not accompanied with a new low in the measure of Stochastic oscillator indicator, when Indices price formed a new low then the stochastic Indices indicator should have followed suit, but the stochastic indicator did not therefore the Index classic divergence setup.
Indices classic divergence setup is even stronger because there is combination of a divergence Indices trade setup & then followed by a rise above the 20% indicator level. This combines the Overbought & Oversold levels with this divergence setup.
Example 2: Classic Indices Bearish Divergence
A Classic Indices Bearish Divergence setup in the stochastic oscillator indicator and the Indices price is followed by a drop in Indices price.
Stochastic Indicator Classic Indices Bearish Divergence
When Indices price is making new highs but the Stochastic oscillator indicator is not moving beyond its previous high it is an indication the upward Indices trend will reverse and that a Indices bearish divergence trade setup will follow.
This classic Indices bearish divergence setup is even stronger because there's a combination of a Indices divergence with a dip below the over-bought 80 level.
Example 3: Hidden Stock Index Bullish Divergence
Hidden Indices Bullish Divergence trade setup signifies a retracement in an upward Indices trend. This hidden divergence trading pattern is the best type of Index divergence setup to trade, because you are not trading a Indices price reversal, but you are trading within the direction of the market trend.
Stochastic Indicator Hidden Indices Bullish Divergence
Even though, stochastic oscillator indicator made a lower low the Indices price low was higher than the previous and prior low (higher low: HL). This means that even though the Indices sellers made a good attempt to push price down as indicated by the stochastic indicator, this wasn't reflected on the Indices price, and the price did not make a new low. This is the best place to open a buy Index trade, since it's even in an upward Indices trend there's no need for you to wait and chill for a confirmation Indices signal, because you're buying in an upward Indices trend.
Example 4: Hidden Stock Indices Bearish Divergence
Hidden Indices Bearish Divergence setup signifies a retracement in a downward Indices trend.
Stochastic Indicator Hidden Indices Bearish Divergence
Hidden Index bearish divergence Indices setup is the best type of divergence setup to trade, because you are not trading a Indices price trend reversal, but you are trading within the direction of the market trend. This is the best place to open a sell trade, since it's even in a downward Indices trend there's no need for you to wait and chill for a confirmation Indices signal, because you're selling in a downward Indices trend.
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