Stochastic Oscillator Divergence Technical Indicator Stocks

Divergence trading is one of the stocks signals that can be generated when using the divergence indicator stochastic oscillator.

Divergence on stochastic indicator is a signal that a rally or retracement is losing steam & is likely to reverse. It means that the last buyers or last sellers are pushing the stocks price in one way while the majority of other traders have stopped trading in that way & are cautious of a stocks price correction or retracement.

There are 4 types of divergence trading setups which can be traded using this divergence indicator.

Example 1: Stock Classic Bullish Divergence

A Bullish Divergence in the stochastic technical indicator & the stocks price is followed by a rise in stocks price.

stochastic divergence technical indicator

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

In the stocks example above the stocks price set a new low but it was not coupled with a new low in the measure of Stochastic, when price formed a new low then the indicator should have followed suit, but the stochastic did not therefore the divergence setup.

This divergence setup is even stronger because there is combination of a divergence & then followed by a rise above the 20% level. This combines the Over-bought & Oversold levels.

Example 2: Stocks Classic Bearish Divergence

A Bearish Divergence in the stochastic technical indicator & the stocks price is followed by a drop in stocks price.

stochastic divergence technical indicator

When stocks price is making new highs but the stochastic divergence indicator is not moving beyond its previous high it is an indication the up stocks trend will reverse and that a bearish divergence will follow.

This setup is even stronger because there is a combination of a divergence set-up with a dip below the overbought 80 level.

Example 3: Stock Hidden Bullish Divergence

This stochastic divergence indicator setup signifies a retracement in an upwards trend. This is the best type of divergence to trade, because you're not trading a stocks price trend reversal, but you are trading within the direction of the Stocks Trading market trend.

stochastic divergence technical indicator

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

Example 4: Stocks Hidden Bearish Divergence

This setup signifies a retracement in a downward trend.

stochastic divergence technical indicator

This is the best type of divergence to trade with this stochastic divergence indicator, because you are not trading a stocks price trend reversal, but you are trading within the direction of the trend. This is the best place to sell the stocks instrument, since it is even in a down stocks trend there's no need to wait for a confirmation trading signal, because you're selling in a downwards trend.