Types of Divergences

7/30/2019 Types of Divergences

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DIVERGENCE

[back to Setups] [NQoos tests Divergence Indicator for Tradestation] [Yahoo post] [Traders Dream

Method]

tips: Hidden Divergence is the higher % setup, with the trend. Look for price to travel fartherwhen divergence is present.

Divergence Articles -Divergence Article using RSI Divergence using Stochastic Hidden

Divergence Reverse Divergence and Momentum Trend Determination pg6 Looking for

Divergence Divergence Decisions - Joe Ross Divergence Trading by Buffy

trade examples;[092603] [080503][ 080703 Bonds and ES ] [examples from rod618] [archives

NQoos Divergences][CCI divergence confluent with 162 fib extensions] [BLine Stochastic

Divergence]

Recommended books: Momentum, Direction, and Divergenceby William Blau, Technical Analysisfor the Trading Professionalby Constance Brown

Divergence is often said to be a leading indicator. Divergence is price action measured in relationship

to various indicators ie., MACD, CCI, RSI, Stochastic and others or in relationship to another

instrument or measure of the market like Tick.

There are 2 basic types of Divergence.

R e g u l a r D i v e r g e n c e - R D

1-Price is making higher highs while the indicator is not

2-Price is making lower lows while the indicator is not

H i d d e n D i v e r g e n c e -

H D

3-Indicator is making higher highs while

price is not.

4-Indicator is making lower lows while the

price is not.

You will add a powerful tool to your trading style once you have mastered recognizing the above 4

relationships between price and an indicator.

Here is one of mycharts explaining divergence and hidden divergencefrom a few years back when I

researched divergence.
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ergence/divergence080503.pnghttp://www.trading-naked.com/Divergence_regular_divergence_examples.htmhttp://www.trading-naked.com/Divergence.htm#buffydivergtradinghttp://www.trading-naked.com/Divergence.htm#buffydivergtradinghttp://www.trading-naked.com/Articles_and_Reprints/JoeRossTrading%20Manual_C24_200-212.pdfhttp://www.trading-naked.com/Articles_and_Reprints/JoeRossTrading%20Manual_C24_200-212.pdfhttp://www.trading-naked.com/Articles_and_Reprints/Trend_Determination.pdfhttp://www.trading-naked.com/Articles_and_Reprints/Trend_Determination.pdfhttp://www.trading-naked.com/Articles_and_Reprints/Reverse_Divergence_and_Momentum.pdfhttp://www.trading-naked.com/Articles_and_Reprints/Hidden_Divergence.pdfhttp://www.trading-naked.com/Articles_and_Reprints/Hidden_Divergence.pdfhttp://www.trading-naked.com/DivergenceStochasticHoward.htmhttp://www.ensignsoftware.com/tips/tradingtips23.htmhttp://www.trading-naked.com/traders_dream.htmhttp://www.trading-naked.com/traders_dream.htmhttp://www.trading-naked.com/DivergenceYahooPost_2_17_03.htmhttp://www.trading-naked.com/divergence-momentum-indicator.htmhttp://www.trading-naked.com/Setups.htm


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1. Divergenceaka Regular Divergence aka RD2. Reverse DivergenceakaHidden Divergenceaka Continuation Divergence akatrend

divergenceare all names for the same thing.3. Tick/Price Divergence- divergence measured comparing price to Tick. All forms regular,

hidden, slope are found.

4.

Slope Divergence- this does not follow the HH-LH opposite comparison. Instead both have aHL or LL but when comparing the slopes their is a good disparity. At what point are the slopes

considered a good enough disparity to warrant trading?.. that's a judgment called. Screen time

will be your teacher.5. Ribbon Divergence- this refers to the divergence that can be seen using a Bline template on the

multiple stochastic ribbons in the bottom indicator window.

6. Positive Reversal7. Negative Reversal8. Under/Over Divergence9. Multiple divergences

This article originally appearedin Ensign Software Newsletter July 2002

Divergence Cheat Sheetby Vaughan Kilpatrick

It's about higher highs and lower lows. If you find them in price, but not in the oscillator, you haveregular divergence. If you find them in the oscillator, but not in price, then it's hidden divergence.

Higher Highs => Short

Lower Lows => Long

At first this seemed to me like the opposite of common sense, so I had to think about it for awhile. I finally got it that it means when higher highs or lower lows in either price or an oscillatoraren't confirmed by the other, then the direction indicated by the extremes, meaning the higherhighs or lower lows, is weak and is likely to change.

If the higher highs or lower lows are in price but not the oscillator, then the direction of price islikely to reverse. This is regular, or classic divergence and can be used as a confirmingindicator for a reversal entry.

Regular divergence describes a price trend change that will probably happen in the future, albeit

shortly. On the other hand, hidden divergence is a confirming indicator of past price direction.

We have hidden divergence when we have higher highs or lower lows in theoscillator but not inprice. In this case the direction indicated by higher highs or lower lows in the oscillator iscontradicted by the price trend. Unlike regular divergence, where the weakness in price trend isabout to lead to a reversal; here the weakness has already led to a little reversal against thetrend. The hidden divergence implies that this recent little reversal in price direction will beshort-lived and that price will resume moving in the direction of the trend. This is exciting because
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it can confirm a continuation entry, which is generally much less risky than a reversalentry. What you have here is the opportunity to enter on a pullback of the current trend, which youexpect to continue based on this and whatever other indicators you choose. This is trading with thetrend, nice and friendly; however, please heed the following warning.

Warning: I consider divergence to be an indicator, not a signal to enter a trade. It would beunwise to enter a trade basely solely on this indicator as too many false signals are given; however,on the other hand, I consider it even more unwise to trade against this indicator.

Thanks to NQoos for sharing his knowledge in the NQ/ES Paltalk room and providing so manywonderful examples of divergence in his great charts posted atwww.dacharts.com. Also thanks toDave Shedd and Buffy for bringing us all together and for freely and generously sharing their timeand knowledge.

SUMMARY OF FOUR TYPES OF DIVERGENCE

Regular Divergence:

Higher highs in price and lower highs in the oscillator which indicate a trend reversal fromup to down.

Lower lows in price and higher lows in the oscillator which indicate a trend reversal fromdown to up.

Hidden Divergence:

Lower highs in price and higher highs in the oscillator which indicate a confirmation of theprice trend which is down.
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Higher lows in price and lower lows in the oscillator which indicate a confirmation of theprice trend which is up.

On the diagram, the diagonal lines represent the trend lines drawn on a chart showing how each ofthe four patterns look with price above and the oscillator below. On the two price lines, going

either from right to left or left to right, the reversal of the diagonal lines shows the direction to beexpected by each instance of divergence. In each of the four instances of divergence, when price isheaded up, green, chances are good it will turn down, red, and vice versa.

Copyright 2003 - Ensign Software

Lets start with explanation of divergence from another great Buffyarticle that appeared in Ensign

Software Newsletter July 2002

Divergence Tradingy Buffy and NQ/ES Pals

Regular Divergence. Hidden Divergence. "What a great tool, it really works!" "I see divergences all over

the place and would get chopped to pieces if I traded all the signals. Just doesn't work for me!" These arecomments and other variations of them that are heard all the time in the NQ/ES Pals chat room. Hopefully,

we can clear up some of the confusion so you will be able to add regular and hidden divergence successfully

to your trading toolbox.

Divergence is a comparison of price to technical indicators. It can also be a comparison to another symbol

or spread between two symbols. Divergence occurs when what you are comparing is moving in opposite

directions. Divergence can signal an up coming change in trend, a change of trend in progress or that a trendshould continue. A divergence signal suggests watching for a trading opportunity in the direction of the

signal. Divergences may continue over many swing highs/lows so price action should confirm yourtrade. This can be done in many ways, some of which are: price making a higher high/low or lower high/lowor price testing the last swing high/low, price trading past high or low of previous bar, many of which will

correspond with the MACD histogram crossing zero.

Divergence trading can be used on many indicators -- Stochastic, MACD, RSI and CCI to name a few. As

with most indicators, divergence signals in a higher time frame (TF) are going to indicate a larger move in

price. The chart examples are going to be comparing price with the Stochastic and MACD indicators. Eachchart has the 50EMA (Blue), 200EMA (Red), 9/3/3 Stochastic and the 7/10/5 MACD histogram on it. There

are many other Stochastic and MACD settings that also work for divergence signals.

Regular divergence (RD) is best used at the test of a previous high or low, what most traders call a double ortriple top/bottom. It is not uncommon to see 3 or 4 higher highs in price in an up trend with 3 or 4 lower

highs in the indicator or 3 or 4 lower lows in price in a downtrend with 3 or 4 higher lows in the

indicator. This is called 3pt RD or 4 pt RD. This is the indicator telling you with regular divergence that thetrend is getting weak and the potential for a change of trend is there and to trade accordingly. To some

traders, it might mean to tighten stops, while others might prepare to exit the trade.

Hidden divergence (HD) is best used in trends for continuation trades with the trend. A high percentage of
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hidden divergence trades will move at least to the last swing high/low, thereby giving you a way to calculate

your risk/reward for the trade. If there isn't enough points between the signal and the last swing high/low,

then many traders will usually pass on the trade. Another warning to pass on the trade signaled by HD is

having RD present for the last 3 highs in an up trend or last 3 lows in a downtrend which is thereby signalinga possible change of trend (COT).

Many of you already use regular divergence in your trading. When a fellow trader,NQoos, shared how he

used regular and hidden divergence in his trading and posted his charts as the trading day developed, many

traders in the NQ/ES Pals chat room became aware of hidden divergence (HD). Regular divergence (RD)used with hidden divergence (HD) can improve your percentage of winning trades. How much depends on

your style of trading.

As long as price is making higher highs and higher lows, that time frame is considered to be in an up

trend. When price is making lower highs and lower lows, that time frame is considered to be in a downtrend.

The following two charts are an example of regular divergence. Just because we see regular divergence

when comparing two highs in an up trend or on a comparison of two lows in a downtrend, it is not anautomatic trade. If the trend is strong enough, you may only get sideways price action or a one or two bar

retracement before the trend resumes. Regular divergence can be a tool to answer the question of whetherthe trend is gaining or losing momentum.

Regular divergence in an up trend (higher highs/higher lows) compares the higher highs in price with thehighs in the indicator. Note that both Stochastic and MACD have a lower high while price has a higher

high...a signal the trend is getting weak.
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Regular divergence in a downtrend (lower highs/lower lows) compares the lower lows in price with the lows

of the indicator. Note that both the Stochastic and MACD have higher lows while the price has lowerlows....a signal the trend is getting weak. This chart also shows an example of 3pt RD -- each lower low in

price has a higher low in the MACD. RD can also have 4pt and 5pt divergence before the trend actually

changes.


7/11

Hidden divergence compares the higher lows (HL) of price in an up trend with the lower lows (LL) in the

indicator and the lower highs (LH) of price in a downtrend with the higher highs (HH) of theindicator. Hidden divergence helps to answer the question of whether the trend is going to continue. The

following chart shows how HD can confirm which flags/retracements are the high percentage continuation

trades to take. When you draw a trend line (TL) on the indicator you are using, you want the length to matchthe TL drawn on price on the chart. Note the price action entry for many traders corresponds with MACD

crossing zero.


8/11

Another time to look for a divergence is after a period of consolidation or sideways movement in the marketthat also has a test of a previous high or low in the consolidation range. The following chart shows thebenefit of drawing trend lines (TL) as soon as you have the two points to do so (the red arrows on left). Each

touch of the TL by price is a place to check to see what HD is saying. The test of TL by price about 1:30,shows an example of how RD can be a warning that the HD signal, if taken, will not reach the target of the

last swing low.


9/11

The following chart shows how to use divergences with trend lines and anticipated MACD cross of zero at

the same time the TL is being broken. Divergence is implying that price will have the strength behind it to

take out the trend line resistance. Notice the setup started in the higher time frame inserted chart. Droppingdown to a lower time frame enabled us to have a better entry point with less risk.

The chart shows how divergence signaled two identical setups for low risk longs on a trend line (TL) breakof the light blue TLs also coinciding with the MACD crossing zero. The second low risk long also has HDdivergence with the previous low in its favor also. Note that the 3pt regular divergence shown in the higher

time chart in the oval is usually worth paying attention to.

Also, on this chart many other regular and hidden divergences have been marked. The divergence trades

combined with trend lines, Fibonacci levels, support, resistance and/or patterns are higher percentage trades.


10/11

NQoosrules that he uses for divergence trading system along with many chart examples can be reviewed

athttp://www.dacharts.com/NQoos.php. Remember what all those good books say though, "Each trader

should find what works for them." Nothing wrong with taking an idea from here and an idea from there to

make your own system. We call that the "trading cocktail" in the chat room. But, that is another article...

AgainNQoos, thanks for sharing your way of trading with divergences with fellow traders NQ/ES Pals chat

room! Also, a big thank you to fellow traders for their constructive suggestions regarding this.

TheEnsign Trading Tips Newsletterhas articles on Stochastic and RSI divergence that are well worthreading.
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August 2001November 2001
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Types of Divergences