Divergence trading involves identifying potential market turning points by looking for instances where a price moves in one direction while a technical indicator moves in the opposite direction. There are two main types of divergence - bullish divergence, where the price is falling but an indicator like MACD or RSI is rising, and bearish divergence, where the price is rising but the indicator is falling. Traders look for divergence patterns at potential support/resistance levels and use confirmation signals like candlestick patterns to identify trade entry points, with the goal of capitalizing on reversals in price triggered by changes in market momentum.

1. BULLISH AND BEARISH
DIVERGENCE TRADING
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2. Trading divergence involves the use of price action and technical
trading indicators to find potential turning points in the market.
Finding a divergence is not a guarantee that a shift in price is
going to happen but combined with other information, can be a
decision-maker for a trader.
What Is Divergence?
Divergence is when the price is going one way and a trading
indicator is going another.
There are two main types of divergence:
Bearish divergence:
Price is moving upwards with new swing highs but a momentum
indicator (MACD, RSI, Momentum) is moving to the downside.
Seeing bearish divergence should have a trader at least
considering a downside price move

3. Bullish divergence:
You will see a momentum indicator moving upwards while the
price is still heading to the downside. Traders with short
positions may want to manage the trade while others may look
for a trading position to the upside.
What Indicators To Use For Divergence Trading
There are three main trading indicators that traders will use when
considering regular divergence: MACD (moving average
convergence divergence), RSI (relative strength index), and the
Stochastic Oscillator.
MACD Indicator
When using the MACD, I prefer to use a modified version called
the 3/10 oscillator. Here is a graphic of the settings I use for this
modified MACD which makes it more sensitive to price action.

4. This would be a good setting for swing traders who are just
looking to take advantage of one clean swing in the market. It
also makes it much easier to spot the diverging momentum.

5. We are essentially comparing the peaks of the fast line and the
peaks of the price.
On this futures chart, from A-B we can see price make a higher
high. The momentum indicator made lower highs from C-D. This
indicates a market losing momentum or a bearish divergence
pattern.
The opposite would be bullish divergence where price makes a
lower low yet the MACD makes a higher low. Price eventually
dropped 5% from highs to the lows off the right side of the chart.
RSI Indicator For Divergence
The relative strength index is another indicator traders will use to
spot a divergence in the market. You would use it, in the same
manner, you would the MACD.
The RSI is set to 14 periods and in this example, we are looking
at bullish divergence.
If you compare A and B, you can see both are making new
lows. Over on the right, comparing C and D, price is making a

6. lower low while the RSI is making a higher low. Traders would
look for a trading position using their strategy.
Using the Stochastic Oscillator
Wrapping up the indicators with the stochastic oscillator, keep in
mind that you would use all the indicators in much the same
way. For this example, the settings for the stochastics is 14,3,3
The price made a new high from A-B while the indicator made a
lower high from C-D. Momentum came into the market and we
saw a 17% drop in price.
Not all divergence setups will result in an adverse price move and
some time we will see complete trend changes. Divergence is not
always seen in price reversals and often times price will transition
into a range. Traders should consider other qualifications for a
trade.
Trading Strategy
Keeping it simple, what does divergence mean? A potential
reversal in price. That's it.

7. First thing is that we want to have some reason that price may be
ready to reverse. Keeping that in mind, look for specific points in
the market.
To have a strong reaction, we need to have traders that are in a
long position if we are looking for bearish
divergence. Candlestick analysis where you look at the size of
the candles can show if traders are still piling into longs. What
we want is to have these traders running for the exits once the
new high fails to continue.
Look to have a trigger that when occurs, puts the odds in your
favor of some time of movement in your direction and less false
signals.
Strategy Outline
1. Keep your eye on points on the charts such as previous
reversals and support/resistance zones
2. Look for momentum in the first leg you are comparing to
add to the probability of a strong reaction
3. Use a trigger (trendline break, reversal candlestick patterns,
multiple time frame pattern) that gets you into the market
This is a day trading time frame of Platinum and let's break down
each stage of the trade.

8. 1. This line represents potential resistance and as you can see
by the large candle and shadow on the left, we expect a
reaction.
2. Momentum is pushing the price higher and the MACD makes
a high
3. Price breaks the previous high, the MACD puts in a lower
high and the trigger would be a break of the low of the
candlestick that broke the high.
Let's look at another example.

9. 1. There is a congestion zone to the left of the chart as well as
the double bottom showing support
2. Momentum shows up, obvious due to the candlestick
formations, into the break of support. Price makes lower
low while MACD makes higher low showing divergence
occurring.
3. Entry trigger as a break of the high for the candlestick that
broke support.
Regular Divergence vs Hidden Divergence
Hidden divergence is one that happens during a trending price
move signifying a trend continuation. The regular divergence
hints to a reversal of the trend.
As an example of hidden bullish divergence:
• Price makes a higher high in a trend
• The indicator you are using makes a low

10. I pay no attention to hidden divergence because we only know a
trend is continuing when it continues.
Stop Loss and Price Targets
Since we are looking for a reversal, putting our stop loss at the
pivot point of the reversal plus a buffer makes sense. If the
divergence is going to hold, we want price to move in our
direction and not reverse soon after entry.
Price targets can be a multiple of your risk, a break of a larger
trend line, price structure or use a trailing stop.
What Did We Cover?
1. Divergence is a reversal signal that happens when the price
goes in one direction while the indicator goes another
2. We consider two types of divergences: bullish divergence
when the price is moving down while the indicator is moving
up. Opposite for bearish divergence
3. We can use the MACD, Stochastic oscillator or the RSI for
our indicator
4. Look for this pattern as potential turning points and use a
trigger for your entry