A divergence occurs when a financial asset continues to rise or decline

contrary to a technical momentum indicator.  To bypass common trading

mistakes, it is imperative to know how do the professional traders trade

divergence.

Image: showing divergence samples

Types of divergences

1/ Bullish divergence

It takes place while a financial security

continues to weaken, but momentum oscillators such

as MACD, RSI, CCI or stochastic indicator become bullish.

See the chart

Image: 3-Minute chart showing a MACD

bullish divergence of Dow Jones Industrials.

2/ Bearish divergence

Contrary to the bullish divergence,

it happens when a financial asset

continues to rise at the moment

when the stochastic or any other

momentum indicator turns bearish.

See this chart

Image: 30-Minute chart showing a prolonged

MACD bearish divergence for NASDAQ 100.

3/ Discrepancies (another divergence)

Discrepancies are unusual divergences that correlate to the price's speed in

comparison to a momentum indicator's.

In this occurrence, either the price or a momentum indicator is faster than the other　

even though both are moving in the same direction.  Really, there is a divergence

between the two speeds.  One is faster than the other.

This event is quite notable particularly if one is applying the Commodity Channel

Index (CCI indicator).

See the chart

Image (below): A weekly chart showing a discrepancy (divergence) between a faster

CCI indicator period 30 and slower Dollar-Yen currency pair (attention to

green vertical line on the chart)

Notice that the CCI oscillator went quickly too far away from the center line

after the price broke a bearish trend line.  On the other hand, the price did

not deviate too far away from the red moving average 30.  This was a bullish discrepancy.

Day or swing traders would give priority to bullish signals above the turquoise horizontal

line.  Though a bullish trade setup alert was in place, one would wait until a clear-cut

trading signal is fired above the turquoise line.  [Author = George Beaulieu]

Divergence technical analysis

A bullish divergence is a notification that

alerts day or swing traders about a

potential reversal at the end of a bearish

trend or progress.  Just the opposite to

 the prevailing opinion, it is not a

trading signal but a trading setup. 

One must perform a top-down

trading strategy instead of racing to

buy the financial asset without a firsthand trading signal.

It is reasonable to dissociate a trade warning from trade signal to keep away from

trading errors.

Similarly to the bullish divergences, bearish divergences alert day or swing traders
about a likely reversal hot spot trading zone at the end of a bullish trend or impulsive

wave.  The alarm does not guarantee that the financial security will turn around. Day

and swing traders will acknowledge the warning without ordering a premature bearish

trade.  Financial market traders and investors ought to view a bullish or bearish

divergence as a hint, but they will only buy or sell financial assets after the price

reinforces it.

See this video

Title: How To Trade MACD Divergence Like An Expert

Authorship: This article is written by George Beaulieu

founder of stochastic-macd.com

How do the pros trade bullish divergence

Beginning from the reality that a divergence is a warning, not a signal, a disciplined

professional day or swing trader will only buy after the price is out of the bearish

channel and gain a support.

Surely, one is not trading the indicator but the price.  Consequently, if the price is

still in a declining channel, one should not set buy orders.  It is cautious to wait until

a credible support is secured, or the financial instrument manifests the first higher

low above the declining channel.


In every case　except on the entry time frame; a professional trader will always
consider a bullish divergence as a　trading setup.  Subsequent, he or she will switch

from the setup time frame to signal period before opening the trade at a low-risk

entry point.

 
How does a pro trade bearish divergence

A bearish divergence takes place while the price is still in a rising channel.
To dodge common trading mistakes, a professional trader who recognizes a bearish

divergence on the daily chart, will turn to the hourly chart and anticipate the price to

 burst above plus retest the declining channel.  In that situation, the hourly chart is

the signal time frame, yet the daily chart is the setup time frame.

He will further shift to a quieter time like the fifteen-minute chart to start the trade.

Divergence: final point

To trade divergences like a professional trader, it is vital to apply a multiple time frames
trading method (trading drill or top down trading).

First, one will notice the divergence (bullish or bearish) on the setup or higher time frame.

Alongside, one will await a signal on another time frame without infringing the market

patterns.

By the Same token, in the end, one will insert a trade at a low-risk entry spot.

Supposing that the trading signal fails, one will swiftly cut losses without blinking.

Any divergence is a non-confirmation trade structure that entails extra confirmation before

one can buy or sell a financial contract.  Besides divergence speculation, one can not

gain consistent profit if one dismisses specific fundamentals.  [Author = George Beaulieu]