Summary: Divergences
Another way is to make use of
momentum tricks by watching out for an actual crossover or waiting for the
oscillator to move out of the overbought/oversold region. You can also try
drawing trend lines on the oscillator too.
With these nifty tricks, you can
guard yourself against false signals and filter out those that’ll be very
profitable.
On the flip side, it is just as
dangerous trade against this indicator.
If you’re unsure about which
direction to trade, chill out on the sidelines.
Remember that taking no position
is a trading decision in itself and it’s better to hold on to your hard-earned
cash than bleed Benjamins on a shaky trade idea.
"If you don’t see yourself as a winner, then you cannot
perform as a winner."
By Zig Ziglar.
Summary: Divergences
Please keep in mind that we use
divergence as an indicator, not a signal to enter a trade!
It wouldn’t be smart to trade based
solely on divergences since too many false signals are given. It’s not 100%
foolproof, but when used as a setup condition and combined with additional
confirmation tools, your trades have a high probability of winning with
relatively low risk.
There are a bunch of ways to take
advantage of those divergences.
One way is to look at trend lines
or candlestick formations to confirm whether a reversal or continuation is in
order.
"Sometimes our toughest challenges turn out to be our
greatest blessings."
By Billy Cox.
9 Rules for Trading Divergences
9. Take a step back
Divergence signals tend to be more accurate on the longer
time frames. You get less false signals. This means fewer trades but if you
structure your trade well, then your profit potential can be huge. Divergences
on shorter time frames will occur more frequently but are less reliable.
We advise only look for divergences on 1-hour charts or
longer. Other traders use 15-minute charts or even faster. On those time
frames, there’s just too much noise for our taste so we just stay away.
So there you have it kiddos – 9 rules you MUST follow if you
want to seriously consider trading using divergences. Trust us, you don’t wanna
be ignoring these rules. Your account will take more hits than BabyPips.com’s
Facebook fan page.
Follow these rules, and you will dramatically increase the
chances of a divergence setup leading to a profitable trade.
Here’s an example of how a bearish divergence failed. Can
you figure out which of these 9 rules Cyclopip broke?
Now go scan the charts and see if you can spot some
divergences that happened in the past as a great way to begin getting your
divergence skills up to par!
"It is during our moments that we must focus to see the
light."
By Aristotle Onassis.
"The true sign of intelligence is not knowledge but
imagination."
By Albert Einstein.
9 Rules for Trading Divergences
8. If the ship has sailed, catch the next one
If you spot divergence but the price has already reversed
and moved in one direction for some time, the divergence should be considered
played out. You missed the boat this time. All you can do now is wait for
another swing high/low to form and start your divergence search over.
"You are never too old to set another goal or to dream
a new dream."
By C.S.Lewis.
"In 1995 I had $7 bucks in my pocket and knew two
things; I’m broke as hell and one day I won’t be you can achieve anything!"
By Dwayne ‘The Rock’ Johnson.
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"As you start to walk out on the way, the way appears."
By Rumi
9 Rules for Trading Divergences
7. Ridin’ the slopes
Divergence only exists if the SLOPE of the line connecting
the indicator tops/bottoms DIFFERS from the SLOPE of the line connection price
tops/bottoms. The slope must either be: Ascending (rising) Descending (falling)
Flat (flat)
"Every saint has a past and every sinner has a future."
By Oscar Wilde.
"If you run into a wall, don’t turn around and give up.
Figure out how to climb it. Go through it, or work around it."
By Michael Jordan.
6. Keep in Line
The highs or lows you identify on
the indicator MUST be the ones that line up VERTICALLY with the price highs or
lows. It’s just like picking out what to wear to the club – you gotta be fly
and matchin’ yo!
"If you want something in your life you’ve never had,
you’ll have to do something, you’ve never done."
By JD Houston.
9 Rules for Trading Divergences
5. Be Fly like Pip Diddy
If you draw a line connecting two highs on price, you MUST
draw a line connecting the two highs on the indicator as well. Ditto for lows
also. If you draw a line connecting two lows on price, you MUST draw a line
connecting two lows on the indicator. They have to match!
"Build your own dreams or someone else will hire you to
build theirs."
By Farrah Gray.
"Don’t read success stories, you will only get a
massage. Read failure stories, you will get some ideas to get success."
By Dr. Abdul Kalam
9 Rules for Trading Divergences
4. Eyes on the Price
So you’ve connected either two tops or two bottoms with a
trend line. Now look at your preferred indicator and compare it to price
action. Whichever indicator you use, remember you are comparing its TOPS or
BOTTOMS. Some indicators such as MACD or Stochastic have multiple lines all up
on each other like teenagers with raging hormones. Don’t worry about what these
kids are doing.
"You’ll gain nothing without hardwork. And even if you
do, it won’t last for long."
By Rajnikanth.
"The things you do regularly are 100X more important
than those things you do rarely."
By Robin Sharma.
9 Rules for Trading Divergences
3. Do Tha Right Thang – Connect
TOPS and BOTTOMS only
Once you see two swing highs are
established, you connect the TOPS. If two lows are made, you connect the
BOTTOMS.
Don’t make the mistake of trying
to draw a line at the bottom when you see two higher highs. It sounds dumb but
really, peeps regularly get confused.
"Expose yourself to your deepest fear, after that you
are free."
By Jim Morrison.
9 Rules for Trading Divergences
2. Draw lines on successive tops and bottoms
Okay now that you got some action (recent price action that
is), look at it. Remember, you’ll only see one of four things: a higher high, a
flat high, a lower low, or a flat low.
Now draw a line backward from that high or low to the
previous high or low. It HAS to be on successive major tops/bottom. If you see
any little bumps or dips between the two major highs/lows, do what you do when
your significant other shouts at you – ignore it.
"Don’t be ashamed of trying. Every journey has to start
somewhere."
By Unknown Author.
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"Walk away from the 97% crowd. Don’t use their excuses.
Take charge of your own life & join the 3%."
By Jim Rohn
9 Rules for Trading Divergences
1. Make sure your glasses are clean
In order for divergence to exist, price must have either
formed one of the following:
-Higher high than the previous high
-Lower low than the previous low
-Double top
-Double bottom
Don’t even bother looking at an indicator unless ONE of
these four price scenarios have occurred. If not, you ain’t trading a
divergence, buddy. You’re just imagining things. Immediately go see your
optometrist and get some new glasses.
"If you want to be a lion, you must train with lions."
By Carlson Gracie.
"Yes, everything is simple. It’s people who complicate
things."
By Albert Camus.
9 Rules for Trading Divergences
Before you head out there and
start looking for potential divergences, here are nine cool rules for trading
divergences.
Learn ‘em, memorize ‘em (or keep
coming back here), apply ‘em to help you make better trading decisions. Ignore
them and go broke.
"Life can only be understood backwards; but it must be
lived forwards."
By Soren Kierkegaard.
