subject: Divergence Trading Using Stochastics [print this page] Divergence Trading Using Stochastics Divergence Trading Using 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. But a divergence taking place on the weekly chart means an intermediate term trend change that will be much stronger than the short term counter trend move 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. And in case, you are not in a trade and you spot a divergence developing on the weekly charts, get ready to enter into a trade in the direction that the divergence is predicting the major retracement. Divergence trading is something you should master. Many traders trade divergences and are able to make good profits.Suppose, you are in a trade when you spot a divergence appearing on the Stochastics. Take profit for now by exiting half of the position. Now, if the stochastics divergence works, use the upside crossover to trigger a reentry buy order.
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