Divergence Trading With Stochastics

Divergence is a popular tool used by traders to find high probability trade setups. Divergence is simply a disagreement between the price movement and the indicator movement. For example, if the price action is moving up while the indicator is moving down, it is a divergence. Similarly, if the indicator is moving up and the price action is moving down, it is again a divergence. The indicator used in divergence trading are the MACD, Stochastics, RSI etc. In this article, we will discuss how to trade divergences using Stochastics.

Now, keep this in mind that divergence on a daily chart is quite different than the divergence on the weekly chart. Divergence on the daily chart means that the price will make a short term counter trend move in the next one to five days.

Whereas a divergence on the weekly chart means that an intermediate trend change is about to happen. What this means is that if there is a weekly divergence, the counter trend move will be quite strong as compared to the divergence on the daily chart. So, divergence on the weekly chart is a stronger signal as compared to that on the daily chart.

Now, when a divergence takes place either on the daily chart or the weekly chart, it does not mean that the trend change will take place immediately. You can't simply buy and sell on spotting a divergence.

But when %K line changes direction but is unable to cross the %D line before changing its direction back to the original direction, ignore this signal.

Now suppose, you don't have any position in the market. You spot a stochastics divergence appearing on the weekly charts. As said before, divergences appearing on the weekly charts are far more powerful than those appearing on the daily charts. Except a major retracement happening in the market soon. Look for entering into the market in the direction that the divergence is predicting.

In case you are long or short and you spot a divergence appearing simply exit the market on the first best opportunity like the appearance of the reversal bar pattern etc! Whatever, stochastics is an interesting technique. Learn how to use them properly and profitably.

Now, when you spot a divergence immediately start planning to exit your position, if you are in a trade.

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