Stochastic Oscillator Bullish Divergence and Bearish Divergence Trading

Divergence Indices trading is one of the Indices signals that can be generated when using the 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 the last buyers or last sellers are pushing the Indices price in one way while the majority of other Stock Indices traders have stopped trading in that direction and are cautious of a Indices price correction or retracement.

There are 4 types of Stock Indices divergence setups

Example 1: Classic Indices Bullish Divergence

A Stock Indices Classic Bullish Divergence in the stochastic oscillator indicator & the Indices price is followed by a rise in Indices price.

Stochastic Oscillator Technical Indicator Classic Indices Bullish Divergence

When the Indices price is making new lows the Stochastic Indices indicator is not moving past its previous lows it is an indication that the downward Indices trend is about to reverse and a bullish rally is likely to occur.

In the Indices example above the Indices price set a new low but it was not coupled 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 Indices 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 & the Indices price is followed by a drop in Indices price.

Stochastic Oscillator Technical 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 trade setup is even stronger because there is a combination of a Indices divergence with a dip below the overbought 80 level.

Example 3: Hidden Indices Bullish Divergence

Hidden Indices Bullish Divergence trade setup signifies a retracement in an upward Indices trend. This hidden divergence setup is the best type of Stock Indices divergence setup to trade, because you're not trading a Indices price reversal, but you are trading within the direction of the market trend.

Stochastic Oscillator Technical Indicator Hidden Indices Bullish Divergence

Even though, stochastic oscillator indicator made a lower low the Indices price low was higher than the previous low (higher low). This means that even though the Indices sellers made a good attempt to push price down as indicated by the stochastic indicator, this was not reflected on the Indices price, & the price did not make a new low. This is the best place to open a buy Stock Indices trade, since it's even in an upward Indices trend there is no need to wait for a confirmation Indices signal, because you're buying in an upward Indices trend.

Example 4: Hidden Indices Bearish Divergence

Hidden Indices Bearish Divergence setup signifies a retracement in a downward Indices trend.

Stochastic Oscillator Technical Indicator Hidden Indices Bearish Divergence

Hidden Indices bearish divergence Indices setup is the best type of divergence to trade, because you're 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 is no need to wait for a confirmation Indices signal, because you're selling in a downward Indices trend.