Divergence Indices Trading Setups
Divergence Indices Definition - Divergence indices trading is one of the indices trading setups used by Indices traders. Divergence indices trading involves looking at a stock indices chart & one more stock indices indicator. For our divergence example we shall use the MACD indices indicator.
To spot this stock indices trading divergence setup find 2 chart points at which trading stock indices price makes a new swing high or a new swing low but the MACD indicator does not, indicating a stock indices trading divergence between stock indices price & momentum.
To look for divergence stock indices signal we look for 2 chart points, 2 highs which form an M shape on the stock indices chart or two lows that form a WShape on stock indices chart. Then look for the same M-shape or WShape on Indices indicator that you use to trade - for examples RSI indicator, MACD indicator or Stochastic Oscillator indicator.
Example of a Stock Indices Divergence Trade Setup:
In the stock indices chart below we spot 2 chart points, point A and point B (swing highs). These 2 chart points form an M-shape on trading stock indices price chart.
Then using MACD indicator we check highs made by MACD technical indicator, 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 Indices Strategy - Divergence Indices Entry and Exit
The stock indices chart above shows example of one of the 4 types of stock indices trading divergence setup, one above is known as hidden bearish indices divergence. Types of stock indices trading divergence setups are covered in the next learn indices trading lesson.
How to spot divergence indices trading setup
In order to spot Stock Indices divergence signal we look for following:
- HH - Higher High - two highs but the last one is higher
- LH - Lower High - two highs but the last one is lower
- HL - Higher Low - 2 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 indices trading terms:
M shapes on Indices charts dealing with Stock Indices price Highs
W Shapes on Indices charts dealing with Stock Indices price lows
Example of M Shapes on Indices Charts
Examples of W Shapes on Stock Indices Charts
Now that you've learned the divergence indices trading terms which are used to explain divergence set-up. Let us look at the two types of indices trading divergences and how to trade these indices divergence chart setups.
The two indices divergence types which are:
- Classic Indices Divergence
- Hidden Indices Divergence
These two stock indices trading divergence setups - classic divergence trading and hidden divergence trading are described on the following learn indices guides in the indices lessons tutorials on this website located at the navigation menu under the topics learn indices trading lessons.
