Just a few days back I had written about divergence. Well it’s a favorite trade set up of mine so thought would make another post out that with illustrations. Two reasons for doing this, one, this is my blog, two, I wanted it in my blog for future reference. As Pring states when the momentum and price are moving in tandem, there isn’t much to read other than assuming we have a healthy trend. It is when the momentum and price get out of sync we have Divergence in hand.
There are 2 basic types of Divergence.
1-Price is making higher highs while the indicator is not: Bearish
2-Price is making lower lows while the indicator is not: Bullish
3-Indicator is making higher highs while price is not: Bearish
4-Indicator is making lower lows while the price is not: Bullish
Divergences test your patience, you have to let them develop and then get ready to put in your trade. One of the mistakes us novices make is we jump the gun too soon when we spot Divergence. It should be remembered (I might as well put this in bold font to drive home the point), Divergences in themselves do not signify a reversal or a trend change, they merely gives us an advanced warning of the underlying strength or weakness in the prevalent trend. The real confirmation comes from the Price action itself.
There is a lot one needs to understand about Divergence, than these simple interpretations. The significance of Divergence, the Divergence Trap and Complex Divergence (will add these later). I reiterate again that one should read Pring’s book on Momentum to get better hang of things. Divergences if traded right, can give phenomenal trades, but then you need to spot them, and wait patiently to let them develop, and finally pull the trigger when the PRICE gives the signal!
"Whether you think you can or think you can't, you're right." Henry Ford