Last week we got into talking about divergences. We talked about what is divergence and basically how to spot a divergence. We said a divergence is when price action on the chart moves in one direction while the indicators that we use (MACD, RSI, Stochastic) moves in the opposite direction.
So this week I thought I would talk about the different types of Divergence and the indicators that help us spot these divergences.
Ok let’s start:
To start things off I would like to tell you which indicators we use to help us spot divergences. First indicator we use is the MACD indicator. This indicator best represent volumes in the market. The next indicator that we use is the RSI indicator and then the stochastic indicator.
Types of Divergences
There are three types of divergences that you see and hear me talk about during or live trading room. There is Regular Divergence, Hidden Divergences, and Continuing Divergence.
First Divergence I want to talk about is Regular Divergence. This is by far the most known out all the divergences. There are different classes of the regular divergence. In the most basic of Regular divergence what we want to see is one of two things:
Either higher highs on the charts and lower highs on the indicator or
Lower lows on the charts and higher lows on the indicator
The indicator that we use to spot regular divergence is the MACD (histogram). We can use the MACD Moving Averages as well along with RSI and Stochastic but what we are looking to confirm a regular and we do that by looking at the histogram.
We look for a positive negative positive on the histogram or the opposite negative positive negative.
One thing to note here is that Regular Divergence usually ends a move whether it is an up move or a down move.
The next Divergence I want to talk about is Hidden Divergence. Now this happens during either an up move or a down move and this is how it works oh and by the way we use the stochastic indicator to identify this. If we are in an uptrend or move we have higher lows right well on the indicator the hidden divergence is spotted on the stochastic indicator with lower lows. To help identify Hidden Divergence think of drawing trend lines. When were in an up move you connect the lows right? And when you are in a down move you connect the highs. This is what it looks like on the charts.
Remember Hidden divergence usually goes with the trend and is usually used to join the existing move.
The next divergence is Continuing Divergence and this is the Divergence that you hear me talk about the most during our Live Trading Room. I love this type of divergence…it is my favorite and this is how is works.
Continuing Divergence is a situation when prices keeping working either higher or lower in a volume less trend which is represented on the MACD histogram. So basically what you see on the charts is price continuing to climb and make higher highs or decline and make lower lows yet you will see on the Histogram volumes continuing to decrease.
Let take a look at what I mean.
Notice how the histogram continues…(GET IT) to decline as price continues…(THERE THAT WORD AGAIN) to create higher highs.
So remember I have only showed you one way for Divergence Bearish or Bullish but it would look the exact same only in the opposite direction for the Bearish example or the Bullish example.
So that is it for this week…
Turn in next time when we talk about how to trade divergences…here’s a hint some use patterns while other don’t use stop losses.
That’s all for now, enjoy weekend 🙂