Divergence Indices Trading Setups
Divergence is one of the trade set ups used by Indices traders. It involves looking at a stock indices chart & one more indicator. For our examples we shall use the MACD indicator.
To spot this trading setup find two chart points at which stock indices trading price makes a new swing high or a new swing low but the MACD indicator does not, indicating a divergence between stock indices trading price & momentum.
To look for divergence we look for two chart points, two highs that form an M-shape on the Stock Indices chart or two lows that form a W-Shape on the Indices chart. Then look for same M-shape or W-Shape on the Indices indicator you use to trade.
Example of a Stock Indices Divergence Trade Setup:
In the stock indices chart below we spot two chart points, point A and point B (swing highs). These 2 points form an M-shape on the stock indices trading price chart.
Then using MACD indicator we check highs made by the MACD, these are highs that are directly below Chart points A & B.
We then draw one line on the Stock Indices chart & another line on the MACD indicator.
Drawing Divergence Indices Trading Lines
The chart above shows example of one of the four types of divergences, the one above is known as hidden bearish divergence, one of the best type to trade. Types of divergences are covered in the next tutorial.
How to spot divergence
In order to spot Indices diverging signal we look for the following:
- HH=Higher High- two highs but the last one is higher
- LH= Lower High- 2 highs but the last one is lower
- HL=Higher Low- 2 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 trading terms:
M-shapes dealing with Indices price Highs
W-Shapes dealing with Stock Indices price lows
Example of M Shapes
Examples of W Shapes
Now that you have learned the divergence trading terms that are used to explain trading set-up. Let us look at the 2 types of divergences & how to trade these chart setups.
There two types are:
- Classic Stock Indices Trading Divergence
- Hidden Indices Trading Divergence
These 2 setups are described on following guides below
