Trading Divergences Between Price and Momentum Oscillators

Types of Divergences (see Markplex link for pictures)

Filters to Increase Probability with Divergences

• Trend
  • Trade in the direction of the trend
  • If trading countertrend, look for signs of trend exhaustion, or scalp a small target
• Not to be used with sideways markets.
  • Divergence is mainly used to play trend continuations and reversals, not for sideways market.
• Divergence is a confirmation, not a trade trigger
  • Trade only with confluence, e.g. with support / resistance, trend lines, key price levels
• Apply divergence on significant peaks
  • Use divergence only when prices are in overbought / oversold levels
• The higher the time frame the more accurate the divergences

Momentum Oscillators Typically Used

• RSI, Stochastics, CCI, OBV, MACD, Williams’ %R, Momentum, 5-15 price oscillator, NYSE TICK, etc.

References

• http://www.youtube.com/v/N2rbfEWleDs
• http://www.trading-naked.com/Divergence.htm
• http://markplex.com/wordpress/wp-content/uploads/2011/12/divergence2.pdf

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