Divergence is a popular trade set up. It does not matter whether it is bullish or bearish. However, there are also false set ups. Therefore, it is necessary to learn to filter out these false warnings. This article teaches few tips and tricks for trading these disparities.

Two divergences

There are two types of divergence: a bullish and a bearish. A bullish disparity occurs when the price displays a lower low but the momentum indicators such as MACD, RSI, CCI, or the slow stochastic indicate a higher low. On the other hand, a bearish divergence takes place when the price displays a higher high but the indicators show a lower high. In normal conditions, most indicators move in tandem with the financial instrument. For instance when the price displays a higher low or a higher high, the momentum indicators will also replicate the price’s pattern. In general a bullish divergence takes place at the end of a downtrend. Conversely, a bearish divergence occurs at the end of an up trend. A divergence is a warning but not a buy or sell signal. Usually these disparities take place before the real signal. It is advisable to wait for the evidence before taking the trade.

In a strong up trend, the price will demonstrate higher lows and higher highs, but if the bullish momentum is weakening, it will fail to establish a new higher high. At this stage, it is customary to see a bearish divergence. On the other hand, when the price fails to show a new lower low in a down trend, a bullish divergence may prove the declining bearish momentum. One should always remember that these are warnings.

Fake divergence

A fake divergence occurs if there is no valid signal after a bullish or bearish disparity. It is a false warning. In the case of invalid bearish disparity, the price will continue to rise or fall if it were a pseudo bullish disparity. The subject of false disparities is critical. However, one can not remove it from the Elliott wave theory. The understanding of the price patterns, the market patterns and the wave principle will allow a trader to identify these false warnings.

Filtering out false disparities.

According to the wave principle, the price moves in five waves plus ABC correction. However, many studies show that false divergences often take place in the first and third Elliott wave. These false warnings do occur in the fifth wave too, but they are less frequent. It is common to see these false warnings during the fifth wave extension. One can avoid these false signals if one knows “how to count waves” and understand the price. The surge in positive or bearish momentum in the first and third “Elliott wave” is one source of these distortions.

True divergence

A real change occurs when the warning introduce a sound buy or sell signal. Equally a strong sell or buy signal after a real divergence is an excellent trade set up. Many observations reveal that real divergences are more frequent in the fifth wave than in any other wave. Traders should pay attention to these warnings in the fifth motion be willing to take a strong signal. If the price rises above the trend line and retests it, before resuming the up move, traders should buy. However, after a bearish divergence in the fifth wave, if it drops below the trend line, and retests it before continuing the down move, traders should sell.

The first bearish set ups are

1/ price is in up trend,

2/ price is now in the fifth wave,

3/ a bearish divergence appears,

4/ price fell below the trend line,

5/ price has now retested the trend line,

6/ and the price is now resuming the down move.

Best bullish divergence steps

1/ Price is in down trend,

2/ price is now in the fifth wave,

3/ a bullish divergence appears,

4/ price rises above the declining trend line,

5/ the price has now pulled back to retest the trend line,

6/ and the price turns around

Divergences are indispensable trade set ups and it is beneficial to learn to trade them successfully. One may investigate and retest these tips and tricks until one becomes fluent in using them. All indicators show warnings, but the price gives the signal to buy or to sell. One will acknowledge the warnings but wait for a strong signal. This article is for educational purposes only.

By George Beaulieu founder of Stochastic-macd.com

By George Beaulieu founder of http://www.stochastic-macd.com

Author Bio: By George Beaulieu founder of Stochastic-macd.com

Category: Finances
Keywords: divergence,trading, trade,tips,stocks,trend line,tricks,market,warnings,bearish,Forex