The 5 Golden Rules of Trading Divergence
Following are five golden trading rules you should follow before you start trading Divergence Trading Strategy:
- There are only four different price scenarios that can show divergence.
- It is common for swing high prices to coincide with the high point of an indicator for bearish divergence.
- The swing low price usually corresponds to the low end of an indicator for bullish divergence.
- To determine the strength of departure, we need to know how steep or wide the line connecting the highs and lows is.
- It is never a good idea to chase divergence if the price action has already played out.
Look at each of these Divergence Trading Strategy rules one at a time.
Rule #1: It Only Exists In Four Different Price Scenarios
Price charts can show divergence only when two tops or two bottoms form, a high rising higher than the previous high, or a low falling below the previous low.
You shouldn’t bother checking your indicator if you can’t observe these price movements. Why is that? This is simply impossible to happen otherwise.
Rule #2: For Bearish Divergence, Only Connect Highs
Everything is straightforward about this second step. In the case of bearish divergence, we draw a line between two highs. On the indicator, you must also draw a line between two highs.
Using price highs and then connecting low points on your indicator is not a good idea. They must match. Ideally, the swing high should match the indicator’s equivalent high. For rapid spotting of corresponding high points, draw a vertical line between the price and the indicator.
Rule #3: For Bullish Divergence, Only Connect Lows
To detect bullish divergence, we look for a connection between the price action’s lows and the indicator’s lows. A price chart’s lows must align vertically with a technical indicator’s.
Rule #4: The Line Slope Hints To The Strength Of The Divergence
An indicator or price action can only demonstrate divergence if its slope is ascending or descending.
A price reversal is more likely if the divergence slope is more significant. Despite this, no one tells you this: the more influential the divergence slope, the bigger the chances of reversing. Moreover, there is exponential growth in the profit potential as well.
Rule #5: Don’t Chase Divergence
By the time the divergence has run its course, it’s too late for you to join the celebration.
When divergence occurs, trade it as soon as possible. If the price starts reversing and is a reasonable distance from its recent swing high (low), it’s better to wait for a new divergence signal.
Even though chasing a market always seems tempting, remember it is a losing endeavor.
Final Thoughts About Trading The Best Divergence Indicator
As with any trading strategy, convergence-divergence indicators have a certain degree of risk. Whatever hand you choose, MACD, RESTI, or Awesome Indicator, you must carefully protect yourself against speculation risks.
By keeping the Divergence Trading Strategy, you can practice unique trading opportunities and increase your winning percentage.
When using the Divergence Trading Strategy, please be careful. After proper backtesting, check divergence and convergence readings using other tools and time frames.
« Trading: Forex Tester Importance Stick Sandwich Pattern: What is it? »
