How to Spot and Trade Bullish and Bearish Divergence Patterns

DIVERGENCE TRADING PATTERNS

• We have a divergence when the price movement is contrary to the indicator movement.

• This type of Regular Divergence pattern comes in two forms, a Bullish Divergence and a Bearish Divergence

BEARISH DIVERGENCE

• This is when price creates higher tops on the chart, while your indicator is giving you lower tops.

• After a bearish divergence, price usually makes a rapid bearish move.

BULLISH DIVERGENCE

• We have a bullish divergence when the price makes lower bottoms on the chart, while your indicator is giving you higher bottoms.

• After a bullish divergence pattern, we are likely to see a rapid price increase.

Reliable Indicators for

Trading Divergencescc: xiaming - https://www.flickr.com/photos/76815233@N00

MACD• When the MACD tops/bottoms are in

the opposite direction from the price’s tops/bottoms, we have a divergence.

• We can get an early entry based on a MACD divergence, and then confirm the signal with a MACD crossover for example.

Example of Bullish MACD Divergence

Bullish MACD Divergence with MACD Crossover Signal

STOCHASTIC• In order to find a divergence

between price action and Stochastic, you should look for discrepancies between the price direction and Stochastics tops or bottoms

Stochastic Bearish and Bullish Divergence

RELATIVE STRENGTH INDEX (RSI)

• The RSI indicator consists of a single line, which moves between an overbought and oversold zone.

• When you find a mismatch between price action’s tops or bottoms and RSI’s tops or bottoms, you have a divergence pattern forming.

Bullish RSI Divergence at Oversold Levels

MOMENTUM + BOLLINGER BANDS

• You can create a Divergence

Strategy using Momentum

with Bollinger Bands

Example Divergence Strategy : You can use the Momentum Indicator to spot divergence with the price action. We can enter trades when the price breaks the Moving Average of the Bollinger Bands

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