Every stock trader wants to buy close to a bottom and sell next to an uptrend’s peak. The market is full of instruments and analysts who claim to provide precise identification of such moments. However, some of them can just be scammers. Provided an investor is unaware and doesn’t know much about the valid and viable way to recognize an about-to-turn trend, this can be a game-changer for them.
Trading Divergence in stock Trading
If you have already signed in a long position and want to figure out the perfect point and time to leave the position, well, divergence is your instrument. Basically, it is just more than an instrument. It’s a concept, or for more congruence, you can term it as math.
To get a transparent view of it in the context of stock trading, let’s look into its definition.
What is Divergence Trading?
Regular traders who have years of experience know about the relationship between different oscillators and the price movement. Usually, when the price is undergoing higher highs, so does it. Similarly, when its experience a lower low, the oscillator also makes lower lows. Visit this site and use the professional demo account from Saxo to enhance your skills. Many UK traders have mastered the art of trading by using this practice account. But don’t expect an easy path during the early stage as the price movement is very complex.
However, there often come times when it doesn’t exactly follow the price movement’s path. They deviate from their normal course, and that’s what is called a divergence in stock trading.
It signals a market participant about a covert situation that cannot be perceived with just normal calculation. Traders really need to look hard to find out what is happening and what movement or event is imminent.
This can help a trader recognize a diluting tend or a growing reversal. It can be a good continuation signal too.
Kinds of Divergences
Depending on what they are featuring or signaling, they can fall into two categories: regular and hidden.
1. Regular Divergence (RD)
RDs are more of signs for trend reversals. They can be of two types:
- Bullish Regular
When the price depicts a higher low, but the p makes a lower low, a regular-bullish divergence emerges. The final phase of a downtrend is the perfect time for such regular-bullish to appear.
When the oscillator, after forming a second bottom, fail to establish another low, it is likely a sign of an about-to-rise movement. This is because the momentum and the amount are meant to progress in line with each other.
This is the complete opposite of the bullish regular. It happens when the price depicts a higher high, and the oscillator shows the opposite. Uptrends are the general provider of such divergence.
An imminent reversal should be read for the price making a second high, and the oscillator makes a lower high.
2. Hidden Divergence (HD)
This variation tells a trader about a potential trend continuation. Assuming trends as favorable situations for traders, we can take HDs as helpful indicators as they suggest a continuation of a trend.
A HD occurs when the price creates HL (Higher Lows), and the oscillator creates LL (Lower Lows).
- HD- Bullish
Mostly when a pair is in an uptrend, a bullish HD’s possibility to emerge increases. Considering the importance of identifying an HD is comparatively easy. Traders should look if the amount is making a higher low and the oscillator fail to copy it. If it shows a lower low instead, traders have their expected bullish-HD in their hand.
- HD- Bearish
As the name suggests, a bullish HD happens during a bearish movement. When the amount creates a lower high and conversely to it, the oscillator makes a higher high, a plot for a possible bearish movement appears.
This is one of the few instruments that are easy to identify and yet highly accurate. So, traders should take it seriously.