Divergence Stock Setups

Divergence Stocks Trading Definition - Divergence stocks is one of the stocks setups used by Stocks traders. Divergence stocks involves looking at a stocks chart and one more stocks technical indicator. For our divergence trading example we shall use the MACD stocks technical indicator.

To spot this  stocks divergence setup find two chart points at which stocks price makes a new swing high or a new swing low but the MACD indicator does not, indicating a stocks divergence between stocks price & momentum.

To look for divergence stocks signal we look for 2 chart points, two highs which form an M shape on the stock trading chart or two lows that form a W-Shape on the stock trading chart. Then look for same M-shape or W Shape on the Stocks indicator that you use to trade - for example RSI indicator, MACD indicator or Stochastic Oscillator technical indicator.

Example of a Stocks Divergence Setup Trade Setup:

In the stock chart below we spot 2 chart points, point A and point B (swing highs). These 2 chart points form an M-shape on the stocks price chart.

Then using MACD technical indicator we check the highs made by the MACD technical indicator, these are highs that are directly below Chart points A and B.

We then draw one line on the stock trading chart & another line on the MACD technical indicator.

Drawing Divergence Stocks Lines - Stocks Divergence Strategy - Stocks Trading Divergence Stocks Entry & Exit

The stocks chart above shows an example of one of the four types of stocks divergence setup, the one above is known as hidden bearish stocks trading divergence. Types of stocks divergence setups are covered in the next learn stocks lesson.

How to spot divergence stocks setup

In order to spot Stocks Trading divergence signal we look for following:

• HH - Higher High - 2 highs but the last one is higher
• LH - Lower High - 2 highs but the last one is lower
• HL - Higher Low - two lows but the last one is higher
• LL - Lower Low - 2 lows but the last one is lower

First let us look at the illustrations of these divergence stocks terms:

M shapes on Stock charts dealing with Stocks price Highs

W Shapes on Stock charts dealing with Stocks price lows

Example of M Shapes on Stocks Charts

Examples of W Shapes on Stock Charts

Now that you have learned the divergence stocks terms that are used to explain divergence trading setup. Let us look at the 2 types of stocks divergences and how to trade these stock trading divergence chart setups.

The two stock trading divergence types which are:

1. Classic Stocks Trading Divergence
2. Hidden Stocks Trading Divergence

These two stocks divergence setups - classic trading divergence trading & hidden trading divergence trading are explained on the following learn stocks guides in the stocks trading lessons tutorials on this website located at the navigation menu under the topics learn stocks lessons.