Before you head out there and start looking for potential divergences, here are nine cool rules for trading divergences. Ignore them and go broke. Okay now that you got some action recent price action that is , look at it. Now draw a line backward from that high or low to the previous high or low. Once you see two swing highs are established, you connect the TOPS.
Now look at your preferred indicator and compare it to price action. Some indicators such as MACD or Stochastic have multiple lines all up on each other like teenagers with raging hormones. 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! 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. 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 minute charts or even faster. So there you have it kiddos — 9 rules you MUST follow if you want to seriously consider trading using divergences. Your account will take more hits than BabyPips. Follow these rules, and you will dramatically increase the chances of a divergence setup leading to a profitable trade. 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 our choices. Partner Center Find a Broker. Next Lesson Divergence Cheat Sheet.More...