how to spot and trade bullish and bearish divergence patterns
Post on 13-Apr-2017
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How to Spot and Trade Bullish and Bearish Divergence Patterns
DIVERGENCE TRADING PATTERNS
• We have a divergence when the price movement is contrary to the indicator movement.
• This type of Regular Divergence pattern comes in two forms, a Bullish Divergence and a Bearish Divergence
BEARISH DIVERGENCE
• This is when price creates higher tops on the chart, while your indicator is giving you lower tops.
• After a bearish divergence, price usually makes a rapid bearish move.
BULLISH DIVERGENCE
• We have a bullish divergence when the price makes lower bottoms on the chart, while your indicator is giving you higher bottoms.
• After a bullish divergence pattern, we are likely to see a rapid price increase.
Reliable Indicators for
Trading Divergencescc: xiaming - https://www.flickr.com/photos/76815233@N00
MACD• When the MACD tops/bottoms are in
the opposite direction from the price’s tops/bottoms, we have a divergence.
• We can get an early entry based on a MACD divergence, and then confirm the signal with a MACD crossover for example.
Example of Bullish MACD Divergence
Bullish MACD Divergence with MACD Crossover Signal
STOCHASTIC• In order to find a divergence
between price action and Stochastic, you should look for discrepancies between the price direction and Stochastics tops or bottoms
Stochastic Bearish and Bullish Divergence
RELATIVE STRENGTH INDEX (RSI)
• The RSI indicator consists of a single line, which moves between an overbought and oversold zone.
• When you find a mismatch between price action’s tops or bottoms and RSI’s tops or bottoms, you have a divergence pattern forming.
Bullish RSI Divergence at Oversold Levels
MOMENTUM + BOLLINGER BANDS
• You can create a Divergence
Strategy using Momentum
with Bollinger Bands
Example Divergence Strategy : You can use the Momentum Indicator to spot divergence with the price action. We can enter trades when the price breaks the Moving Average of the Bollinger Bands
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