Welcome to the second part where I am explaining how you can use divergence with some tips and tricks I have learnt over the years to pinpoint market turning points with high accuracy.
In the part 1 (price swing prediction) we discussed standard divergence and what to look for with your preferred indicator to spot this setup. Now its time to dig a little further and see how deep the rabbit hole goes!
High Probability Divergence Setups!
Through years of trial and error I have discovered what works and what does not. Divergence by itself is a bit hit and miss, you never really know if the divergence will play ball or not. This is probably why many traders give it a try then decide to leave it for something 'supposedly' better. Sadly, they didn't know how close they were to the pot of gold!
By combining divergence with some simple price action tools we can turn that hit and miss setup into a very accurate entry technique.
Before we go into these tools, let me show you my absolute favourite type of divergence. I call it the DTD & DBT (double top divergence / double bottom divergence). This type of divergence has pinpointed trend reversals more times than I can remember. All you are looking for is a double top or double bottom in price then for your preferred indicator to also show strong divergence.
Below is an example of a DBD on the GBPUSD 4H chart, this setup captured a 700 pip trend reversal! In all examples below I am using RSI indicator set to 6 for divergence.
I know what you're thinking, that was cherry picked and just a one off right? Wrong, these setups happen all the time across all pairs, in fact lets take a look what happened at the end of the 700 pip move shown above.
Yep you guessed it another DTD which again captured a trend reversal of almost 900 pips!
Yep you guessed it another DTD which again captured a trend reversal of almost 900 pips!
The reason DTD and DBD setups are so powerful is because they combine confluence of support or resistance into the setup. In order to have similar success with standard divergence you will need to be extra picky about the setups you choose. Look for setups that happen as price is coming up against strong areas of support or resistance.
Timing Your Entries!
Entry's can be tough because most entry techniques are lagging and therefore get you into the move late eating into your potential profits. But don't worry, I am going to show two price action entry techniques I use all the time with astonishing success trading divergence setups.
Once I have a DTD/DBD or standard divergence with strong confluence I start watching price action at the close of each new candle. I am waiting for one of the two candle formations below to clearly appear.
Timing Your Entries!
Entry's can be tough because most entry techniques are lagging and therefore get you into the move late eating into your potential profits. But don't worry, I am going to show two price action entry techniques I use all the time with astonishing success trading divergence setups.
Once I have a DTD/DBD or standard divergence with strong confluence I start watching price action at the close of each new candle. I am waiting for one of the two candle formations below to clearly appear.
Once the candle formation forms and the candle has closed (very important) I enter at market with stops above/below the candle formation.
If you take another look at the two setups above on the GBPUSD you will see that both setups triggered with an engulfing candle formation! A fluke? Nope, this happens all the time :-)
Ok, so that's part two of this mini divergence course over and done with hopefully it has provided you with some new tools to add to your trading toolbox. Remember, the key to success is to be picky, wait for strong confluence to line up or better still a DTD/DBD setup.
We are not done yet though, Follow me over the next few days for more awesome divergence tips and tricks.
Have fun & good trading!
If you take another look at the two setups above on the GBPUSD you will see that both setups triggered with an engulfing candle formation! A fluke? Nope, this happens all the time :-)
Ok, so that's part two of this mini divergence course over and done with hopefully it has provided you with some new tools to add to your trading toolbox. Remember, the key to success is to be picky, wait for strong confluence to line up or better still a DTD/DBD setup.
We are not done yet though, Follow me over the next few days for more awesome divergence tips and tricks.
Have fun & good trading!