Stock Trading Divergence Stocks Trading SETUPS SUMMARY
Stock Classic Bearish Divergence - HH stocks price, LH indicator - Indicates underlying weakness of a stocks trend - Warning of a possible change in the stocks trend from up to down.
Stocks Classic Bullish Divergence - LL stocks price, HL indicator - Indicates underlying weakness of a stocks trend - Warning of a possible change in the stocks trend from down to up.
Stock Hidden Bearish Divergence - LH stocks price, HH indicator - Indicates underlying strength of a stocks trend - Mainly found during corrective rallies in a downwards trend.
Stocks Hidden Bullish Divergence - HL stocks price, LL indicator - Indicates underlying strength of a stocks trend - Occurs mainly during corrective declines in an upward stock trend.
Divergence Forum - Illustrations of the divergence terms:
M-shapes dealing with Stock price highs
M-shapes - Divergence Forum
W-shapes dealing with Stocks price lows
W-shapes - Divergence Forum
These are divergence shapes to look for when using these stocks setups.
One of the best stocks indicator for this stocks setup is the MACD Technical Indicator - as a stock trading signal MACD divergence is a setup to enter a stocks trade. But as with any trading signal there are certain precautions that have to be observed to make this stocks 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 stock technical 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 may not be very important as compared to the 4 hour chart timeframe on MT4 stock platform.
If divergence setup seen on a 60 minute chart, 4 hour chart, or daily chart timeframe, then start looking for other factors to indicate when the stocks price may react to the divergence.
This brings us to a key point when using this divergence setup signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in stocks 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 stocks traders get caught out by entering the stocks market too soon when they see MACD divergence. In many cases, stocks 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 stocks price shoots through his stop loss taking him out.
If you simply look for this divergence trading 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 stocks trading technical indicators.
What other factors should you consider when using this Stocks setup?
1. Support level, Resistance levels and Stocks Trading Fibo levels on higher Stocks Chart Timeframes
Another way to significantly increase the odds of a winning trade is to observe the higher chart time-frames 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 probability of a successful trade based on divergence trade setup on a lower time-frame at this point increases.
2. Reward to Risk Ratio: Stocks Trading Money Management Rules
And finally, when looking for divergence, it is very important that you enter the trade correctly, so that you have a good risk/reward ratio & only open stocks transactions that have more profit potential than what you are risking. If you understand how to enter a trade properly, you can measure your risk/reward before you open a transaction. That way, you can only choose to open orders which offer a favorable ratio.
Finally, when used correctly and combined with other stocks technical indicators to confirm this stocks signal, divergence setup can offer huge profit potential.
