Stock Trading Divergence Stocks Trading SETUPS SUMMARY

Classic Bearish - HH price, LH indicator - Indicates the underlying weakness of a trend - Warning of a possible change in the trend from up to down.

Classic Bullish - LL price, HL indicator - Indicates the underlying weakness of a trend - Warning of a possible change in the trend from down to up.

Hidden Bearish - LH price, HH indicator - Indicates the underlying strength of a trend - Mainly found during corrective rallies in a down ward trend.

Hidden Bullish - HL price, LL indicator - Indicates the underlying strength of a trend - Occurs mainly during corrective declines in an upward stock trend.

Illustrations of the divergence terms:

M-shapes dealing with Stock price highs

M-shapes

W-shapes dealing with Stock price lows

W-shapes

These are the shapes to look for when using these stocks setups.

One of the best indicator for this stocks setup is the MACD Technical Indicator - as a stock signal MACD divergence is a setup to enter a trade. But as with any signal there are certain precautions which have to be observed to make this signal a set-up. Getting straight in to a trade as soon as you see this stocks setup is not the best strategy. This setup should be used in combination with another indicator to confirm the direction of the trend. A good system to combine with is the moving average cross-over system.

Be aware this stocks setup on a smaller time frame is not so significant. When divergence is seen on a 15 minute chart it may or might not be very important as compared to the 4 Hour chart timeframe on MetaTrader 4 platform.

If seen on a 60 minute chart, 4 hour chart, or daily chart timeframe, then start looking for other factors to indicate when the price may react to the divergence.

This brings us to a key point when using this signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this stocks setup is not always the best strategy.

Many investors get caught out by entering the market too soon when they see MACD divergence. In many cases, price has still got some momentum to continue in the current direction. The investor who has jumped in too soon can only stare at the screen in dismay as price shoots through his stop loss taking him out.

If you simply look for this stocks setup without any other considerations you will not be aligning yourself with the best odds, so to increase the odds of making a successful trade you should also look at other factors, specifically other indicators.

What other factors should you consider when using this setup?

1. Support level, Resistance levels and Trading Fibonacci levels on higher Stocks Chart Time Frames

Another way to significantly increase the odds of a winning trade is to observe the higher chart timeframes before opening an order based on the lower time frames.

If you observe that the hourly, 4 hour or daily Stocks chart has met a major resistance, support or Fibonacci level then the probability of a successful trade based on divergence trade setup on a lower timeframe at this point increases.

2. Reward to Risk Ratio: Stocks Trading Money Management Rules

And finally, when looking for divergence, it's very important that you enter the trade correctly, so that you've a good risk/reward ratio and only open stocks transactions thatwhich have more profit potential than what you're risking. If you understand how to enter a transaction properly, you can measure your risk/reward before you open a transaction. That way, you can only select to open orders which offer a favorable ratio.

Finally, when used correctly & combined with other indicators to confirm this signal, divergence setup can offer huge profit potential.