Divergence Trader Strategies

Divergence Trader Strategies is one of the trade set-ups used by Indices traders. It involves looking at a stock indices chart & one more stock indices indicator. For our examples we shall use the MACD technical indicator.

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

To look for Divergence trader strategies 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 Indices Divergence Trade Strategies:

In the Indices chart below we spot 2 chart points, point A and point B (swing highs). These 2 points form an M-shape on the stock indices 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 Lines - Divergence trader strategies

The Stock Indices chart above shows example of one of the 4 types of divergence trader strategies, the one above is known as hidden bearish divergence strategy, one of the best type to trade.

How to spot divergence trader strategies

In order to spot Indices Divergence trader strategies we look for the following:

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

First let us look at the illustrations of these divergence set up trading terms:

M-shapes dealing with Indices price Highs

Divergence trader strategies

W-Shapes dealing with Stock Indices price lows

Divergence trader strategies

Example of M Shapes

Divergence trader strategies

Examples of W Shapes

Divergence trader strategies

Now that you have learned the Divergence trader strategies terms that are used to explain set-up. Let us look at the two types of Indices divergences and how to trade these divergence trader strategies setups.

There two types are:

1. Classic divergence trader strategies

2. Hidden divergence trader strategies

These 2 setups are the most commonly used divergence trader strategies & these are explained on the indices trading strategies section of this site.