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. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade. Master these profitable Forex Patterns and download the Magic Forex Divergence FREE. Get these 3 Swing Trading Systems FREE.
Now, you can spot a divergence on a daily chart. You can also spot a divergence taking place on a weekly chart but there is a difference. Divergence on a daily chart means short term counter trend move that might last from 2 to 4 days as a general rule of thumb. 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, it doesn’t mean that the trend change is going to take place immediately just after the divergence. It can take sometimes before a trend change takes place. A failure in divergence can take place when %K line changes direction but is unable to cross the %D line. In other words, %K line reverses back to the original direction without crossing %D line.
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. Whatever, you should master trading divergences. Now, when you spot a divergence immediately start planning to exit your position, if you are in a trade.