Divergences help us in different ways. For instance, regular divergences, give us signals about potential trend reversals. On the other hand, hidden divergences help us when we want to know if a trend will have a continuation. So, we have prepared some helpful tips for you to maximize the use of divergences fully.
- Be keen and alert. A divergence requires one of these things that we will mention: higher high compared to the previous high, lower low compared to the previous low, a double top or bottom. There is no need to use an indicator until one of the things we have mentioned showed up.
- Drawing lines on the following tops and bottoms. Once there is already a price action, it will only be one of these four: higher high, flat high, lower low, or a flat low. Then, from that high or low to the previous one, you draw a line backward. It needs to follow the major tops or bottoms. Do not stress too much about minor bumps and dips in between the two major highs and lows.
- The only things that you should connect are the tops and bottoms. When you see that two swing highs showed, connect the tops. On the other hand, if two lows showed, you can connect the two bottoms with a trend line.
- Choosing the best-suited indicator. After connecting the tops or bottoms using a trend line, compare the indicator used with the price action. It does not matter which indicator was used; compare it to the tops or bottoms. Do not stress too much about some indicators that have multiple lines.
- Consistency is the key — especially with the swing highs and lows. Drawing a line to connect two highs on the price also means connecting two highs on the indicator by drawing a line. The same rule is valid for the lows. Drawing a line to connect two lows on the price also means connecting two lows on the indicator by drawing a line.
- The price and indicator should have a vertical alignment. Identified highs and lows on the indicator must be vertically aligned with the highs and lows of the price.
- Monitoring of the slopes. Divergence requires that the line slope that connects the indicator’s tops of bottoms should be different from the line slope connecting the price’s tops or bottoms. If it’s not, there will be no divergence.
- Patience. If you missed a divergence, then you can always wait for another swing high or low to form until you can start with hunting divergences again.
- More patience. The longer the time frame, the more accurate the divergence signals. There is a slimmer chance of false signals if you decide to wait a little bit longer but not to the point that you will miss the divergence right now. Waiting means less trade but a great trade can also bring a hefty profit. Shy away from charts that only show what happened in a few minutes. It might be wiser to look at hours’ worth of charts.
There you go!
These are guidelines that can help you when you use divergences when trading. You do not necessarily have to follow them. However, if you want to go home with a better profit, then you should!