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Hello steemians greetings to you all this is a new week as it promise's to kick-start with a beautiful course outlined, we keep exploring it and in a long run gain multiple ideas to improve our trading potential/Skills.
This week the course clearly focused on technical analysis, this is very important while trading this is called Divergence, as the lecture keeps going on I will write about this exclusively, Read below and enjoy.
Describe what divergence is and the types of divergences (e.g., regular and hidden).
In the financial market there are many trader's and everyone makes use of various financial tools to navigate the volatile market divergence for me stand's tall. Divergence occurs when the market moves in opposite form contradicting the indicator been used, meaning market trends can be moving in linear phase while the technical oscillator is moving in a total different direction, when this happen's we can bodily say divergence has occurred.
Whenever divergence occurs we say there has been a shift in the market, we have regular, and hidden divergence, as time goes on I will highlight bearish and bullish patterns of divergence just for proper and clear understanding.
When discrepancies occurs and there is a different behavior of the technical tool in use it means that harmony has been obstructed, what this means is that price movement is loosing credibility looking at both from the bullish or bearish phase thereby change in momentum is eminent.
Significant Of Regular or Hidden divergence And How THey Relate To Reversal Or Trend Continuation.
Regular divergence is very common to detect in a chart as it is usually used by trader's to predict trend reversal, identifying regular divergence some foot-steps has to be implemented which involves the price movement and trend direction, and conclusively the behavior of the indicator been used, when you consider all this trust me you can identify/spot it easily, in the chart look critically well on the bullish and the bearish regulars considering this two you can easily know how regular divergence relates to trend's reversal.
Bearish Regular.
To determine reversal or trend continuation pay attention to this bearish regular, it is the opposite of bullish regular, this is a period in the market where there are series of higher higher's, but looking at the indicator you see another different price action.
Price is showing series of highes, while indicator is showing lower lows, as the case maybe, when this happens the indicator in used can be called a lagging indicator, when this happens it signifies something it means the there is a weakness and price will start to reverse as there could be a potential downtrend.
STEEM/USDT Chart showing bearish regular.
Viewing this chart you will see a clear uptrend with various higher high, once a new low, doesn't outclass the previous lows know that price action is still surging forward, this happened in this chart involving STEEM/USDT.
You can add any indicator of your choice, RSI, MACD, Bollinger Bands etc, just know that once there is lagging along the process never minding the phase of the market at that particular time, reversal is bound to occur, at that process there won't be any form of harmony in price movement.
There will always be a trend continuation if market structure still maintain's it's steal, up until you start noticing a divergence courtesy the technical oscillator in view then you should know that either sellers or buyer's are getting tired and want a change in momentum considering the market phase at the particular phase, it can be in bullish trajectory or bearish phase.
Bullish Regular.
Whenever you see lower bottoms like the lower lows, but the indicator in view or perhaps been used like the (RSI, MACD, stochastic, etc) is seeing forming high's if this happens there is going to be a downtrend, look below.
STEEM/USDT chart showing bullish regular.
When this happens just know that buyer's are getting weak, the buyer's have pushed the price up so they are getting weak by so doing reversal is bound to happen, the potential downtrend is about to take center-stage.
This chart shows series of lower lows, or a lower highs, the little pushed up high didn't outclass the previous high that is the reason why it is called a lower low price action/formation. from the chart price went down to the support level.
At this new support phase you can place a buy as as Many trader's who are willing to buy is at horizon, waiting patiently for uptrend movement's and trend change, note opposite of bullish regular remains bearish regular don't forget this in a hurry.
Looking at the chart while the lower low formation kept on forming there was a price continuation as price was going down, that is called trend continuation because price action continued in one phase, which is lower low.
Hidden divergence.
In hidden divergence both the bullish and the bearish divergence functions together thereby assimilating a weak signal although it is also used while trading, Hidden is often used to describe the potential of price movement in the market after all divergence itself is not apparent.
This signal is hidden which means that it isn't obvious like the bullish and bearish regulars, let's say market makes a formation of higher high, which is uptrend, and the indicator show's otherwise the market may rise as well.
STEEM/USDT chart highlighting Hidden divergence predicting price continuation.
I will say Hidden divergence can also be called trend continuation depending on what price action is at that particular time, let's say indicator is showing higher high, price action is saying higher high there might just be a downward retrogression soon.
Since hidden divergence comprises of bullish and bearish divergence, we can as well have a hidden bullish divergence, and a bearish hidden divergence too as well, divergence can hit a lower bottom and price action touches higher phase price can surge up.
The hidden divergence is complicated and somehow difficult to detect it in chart, it is seen as a price continuation strategy. Looking at the chart above price continued climaxing up there was a hidden divergence at the center after which price continued forming series of high's, hidden divergence is continuity, some of the difference in trading regular divergence and hidden divergence are highlighted below.
| Regular divergence | Hidden divergence |
|---|---|
| Price makes a formation of higher high, while the oscillator makes a formation of lower high (downtrend) | price in the market and the Indicator in use moves in usism, price forming series of lower lows, while the indicator in use forms lower low. |
| There is a formation of lower lows, while the oscillator in use makes a formation of higher low's. | price forms lower high, while the in indicator in use forms higher high. |
| It showcase's trend reversal | It all about trend continuation. |
| It obstructs upcoming trend's to prevail. | It confirms upcoming trend's. |
| During confirmation pay attention to trend-lines, and candle-stick for signals. | Pay more attention on break-outs and retracement zones, to get clean signals. |
Using a chart of Steem/USDT, identify and explain an example of bullish or bearish divergence using the RSI.
Bearish divergence.
My primary focus of trading bullish or bearing reversal is to note and know a point where reversal will take place in the market, trading divergence with other indicator is to get signals before we see a change in trend.
Looking at a bearish divergence there is a formation of high's in the market, but the indicator been used shows a low's, contrary to what price is indicating in the market, let's see a clear example below here I will be make a combination with the RSI indicator.
STEEM/USDT chart Highlighting bearish divergence with the use of RSI indicator.
Looking at the chart above you will see a clear price action of several high's, highlighting several high's, put it to say several higher high price action, at this phase the indicator in use (RSI) Is vividly pointing down-below which means that a possible reversal is eminent.
The signal been provided here simply means the the bulls aren't no more in control of the market thereby the bear is about to gain massive momentum, this will indicate a bearish reversal as soon as price gets to the resistance level.
What this implies is that in most cases the Indicator react's more than the volatile market, look at the chart before price got to the resistance phase the RSI indicator is already pointing down showcasing a change in trend already.
When the RSI gets to 70 and above you should go Short, place a short order and you benefit from the market because as you can see the decrease is on our faces, in this process you go short and not going Long.
Bullish divergence
In bullish divergence price action assimilates a new lows in the volatile market while the indicator been used shows a high, when this happens it is regarded as a bullish divergence, check out for the chart below for proper understanding.
STEEM/USDT chart highlighting bullish divergence, With RSI indicator.
Looking at the chart above there are series of lower high price action while the RSI indicator show's otherwise, this means that bears in the market are no more in control thereby the bulls will soon take over.
Once price gets to the support level there will be a reversal then price will start going up again, at this phase you can make a trading decisions by going long and benefit straight away, one thing that is very important combining divergence with indicator is to detect trend reversals.
Trading divergence in conjunction with RSI indicator is fascinating reason been that the indicator itself Measures how fast trend moves in the market, the Indicator moves ahead of time before the zigzag movement of trend's.
Take a look at both the bullish and the bearish divergence you will understand that before anyone comes to fruition the indicator have already indicated, RSI is a momentum oscillator that it's value ranges from 0-100, thereby determining overbought and oversold in the market at large.
Discuss how this divergence could have informed trading decisions.
With divergence trader's can be able to draw support and resistance line's, this with all honestly helps in making good trading decisions remember support and resistance levels are very crutial while making trading decisions as this two zones are specific areas where buying and selling takes place.
Divergence can as well help trader's to identify the existing trends in the market thereby knowing when the new trend will kick-start expecially combining it with an indicator, as indicator react's faster than the market trend's.
Trading divergence gives you an In-sight of what your trading strategy will look like, every trader has he's or her trading strategy, divergence with RSI indicator gives you a clear entry signal before placing your various orders.
you can trade any kind of divergence for example regular divergence you can spot it if trend's makes a higher high price formation or higher low, but the oscillator in use making a lower highs or lower low at this point you can place a sell or buy orders as with uptrend or downtrend will surely happen.
Trading divergence will help you make huge trading decisions, now look at trading Hidden divergence, at this period you know that when price makes higher low's or lower high's, and the oscillator in use is showing lower low, or higher high simultaneously this show's market continuation signal as a trader you take advantage of it.
Explain how divergence can be combined with other technical indicators (e.g., moving averages, Bollinger Bands.
This is all about a robost analysis involving STEEM/USDT, previously I combined trading divergence with RSI, in here I will be combining divergence with MACD, the purpose of this combination is to provide insight on the steem token
The MACD is a very important oscillator used by trader's to navigate the market, it consists of two M.A, which has two lines the MACD lines and the other one regarded as the signal line, down below we have the histogram that highlights the two difference between the two lines which is contained in the MACD.
Trading divergence with MACD.
Looking at the STEEM chart above I applied the MACD oscillator at the resistance level there was several consolidation before we saw a bullish reversal down to the support level at this phase the MACD, was also in linear form before we saw a potential breakout the MACD has two signal lines, at the phase of the bullish reversal there was divergence as the indicator was going up while price action was forming series of lower lows.
While trading divergence with MACD, as a trader pay lot's of attention on the signal line crossing, whenever you see a crossing above the signal line then there is a potential buy signal, if the crossing comes below then we see a potential sell, combining this two gives a great insight to trend's thereby providing phase to trend reversals.
This two combination helps the trader to make good and credible trading decisions thereby relying on several signal line's and crosses, price action, histogram etc, you can also add your stop loss, and take profit of you sole desire
Trading divergence with MACD, to get insight on the steem Token.
STEEM Token has been on the decline for some couple of weeks last week price was ranging at 0.16, as at the time of writing this post price is at 0.17, I quickly drew a trend line to provide more insight on the analysis, price will surely get down, when price got to the resistance phase there is a potential downtrend breakout, price is coming down back to the support phase.
There isn't any form of divergence as price corresponds with the MACD, Indicator been used at the particular time, there isn't any form of divergence, up until my trend-line is broken then we can see a change in trend, looking at the MACD, oscillator it is pointing downward which means downtown will come to fruition soon, i also marked it out.
Combining moving average with divergence deepens your trading knowledge thereby increasing your changes of making good and quality trading decisions that will make you get lot's of profits in the market overall.
Combining Divergence With Bollinger Bands.
Bollinger Bands is a technical indicator that measures the volatility of a price action, when it is combined by moving average it is very eazy to identify breakout and potential trend reversal's, take a look at the chart below for for more analysis.
Bollinger Bands, MACD,with so Many retracement point's pointed out.
Combining this two powerful Indicator is key, look at the chart above immediately price broke above the upper band and the moving average is downtrending there came a sign to sell, contrarily price traded above the upper phase of the Bollinger Bands considering it's 50 days moving average at this stage we regard it as overbought and a trader should take advantage of it and maximize profit.
Divergence happened at some point where the Bollinger Bands line's compressed which at this point the moving line is supposed to make a cross but that didn't happen instead the signal line kept on moving forward considering the price action.
Whenever price touches the lower band it expands and price surges upwards, thereby touching the previous price action, in trading level's respect's themselves often and react actively whenever it touches the previous price.
Bollinger Band, MACD oscillator pointing out divergence with STEEM/USDT chart
Here there was a combination of MACD, Bollinger Bands oscillator all with the sole motive of making a good and reliable analysis on the STEEM Crypto currency in used with charts and indicator.
Looking at the chart there was a bullish regular, price didn't touch the upper band, price action revolved between the middle band, with downtrend movement expected, looking close to MACD it was consolidating with no clear direction.
What this means is that MACD Indicator is lagging and providing false signal, divergence is occuring with the MACD oscillator, in analysis steem cryptocurrency currency or any other currency all trading parameters has to be put in place.
Once multiple indicator's are been used it provides multiple ways of confirming trend's in the market, it gives the trader so many alternatives, now looking at the chart I confirmed the bullish reversal through the Bollinger Bands and not the MACD, because the MACD was lagging behind.
Create a trading strategy that utilizes divergence as a primary signal for entry and exit points.
Divergence based trading strategy: This trading strategy focuses on recognizes divergence, trend-line, entry and exit points, stop-loss, Take-profits etc. After these are taken into consideration caution will be in place as to the moderlities at which the market will be traded, look at the chart below.
Highlighting divergence, entry and exit point.
Application of trend-line is important to galvanizing this trading strategy as it helps to identify key support and resistance levels, by so doing key Reversal pattern will be initiated expecially the one's that supports the divergence signals, pay attention on the double top and double bottoms.
When all this has been put in-place to confirm your entry point also look at the hidden divergence expecially when price is forming series of high's and the Indicator is showing lower high, or lower low's, or even sideways this show's trend continuation, you can still place your buy.
Looking at the chart above RSI was imputed and divergence was shown, but based on the trend-line I quickly noticed that price will surge up, price was in overbought region and the RSI was at a level below 50, which show's that bulls are fully much in charge.
At the top which was the exit point there came a bullish divergence at this point RSI strategy rose over 60, at the point you don't buy Instead you look for a way to collect your profit because trend reversal is bound to take center-stage.
Divergence gives you a potential trend reversal's, as price touched the resistance phase immediately there was a change in trend and quickly the RSI started working pointing down-wards.
Setting stop loss and Take Profit:
Setting stop and take profit gives you an edge over the market intense of risk management, in here you can actually choose how much you want to get and if trade goes against you how much you are going to loose.
The chart above at the resistance level you place your buy order, 0.1720, the stop loss should be set below the point where you bought you can choose setting at at 0.1700, then the take profit you set it above the price.
What this means is that which ever price goes whether for you or against you, whenever price gets to those points it triggers automatically that is the benefit of setting it, trust me it helps trader's reduce risk in the volatile market.
Risk management strategy.
In risk management you consider position size, some trader's have little funds but risk more when this happens they loose everything and they start blaming and casting aspassions on the market for not favouring them.
When risk management is not applied it Leads to one-thing which is over trading, opening multiple positions with minimal funds which will Lead to total loss.
Monitoring your trades.
When you place your trade be readily available to monitor the progress of your trade expecially when either stop loss or take profit is not set on your trade, when you monitor your trade frequently you will know whether divergence is still valid or whether there has been a change in trend direction.
Exit Strategy;
Whenever price hits your predetermined point close the trade and collect you profit, trading is all about making profits and not losses, let's say divergence weakens or there is a change in trend still stick to your trading plan/strategy.
How To Reduce False Signals.
To reduce false signals while trading divergence you need consider analyzing your market structure which amounts to price action and the use of your RSI indicator
Galvanize a trading patterns like trading reversal's and trend-line break's, marking out your support and resistance retracement zones, chart patterns etc.
When all this are put into use trust me even if divergence occurs you have to use another chart pattern to navigate the market and get good and quality result in the end, just as they say use multiple stones to kill a bed, check this chart below.
Looking at the chart above you will see a clear bullish divergence, now my confirmation didn't just base on just using the RSI to confirm this, I looked at the trend-line break, immediately this happened I knew price was going to downtrend.
When you look at multiple confirmation you by-pass the trick of falling for false signals, in the chart look at the formation of the candlestick formed when price got to the overbought phase, you can see that it was a reversal candlestick.
When this happens reversal's will take center stage, you also look at the higher time-frame like the 4 hours, or the daily timeframe for proper analysis, trend's that emernate's from the higher time-frame can be used in the lower timeframe to place a trade and make good returns.
You also combine multiple indicator's, all indicator's can't be all wrong at once, if one or two lags behind the rest will be there to give you a good entry and exit point in the market, all these should be considered in order to limit the volume of false signals.
Discuss the limitations of divergence trading and how traders can avoid common pitfalls.
Anything that has merit also possess demerits trading divergence is good but along the process it consist of various disadvantages too as well as a trader you should develop a culture to which you can balance the two, to avoid falling into a pit, there are so many limitations but I will highlight some, and they Include.
1 Lagging Indicator:
Divergence relies on on reversal's along this process it produces false signals, especially when there are lots of transitions in price volatility. divergence is normally considered lagging indicator because.
It makes use of historic data.
It doesn't react's to price movement immediately.
It delays alot before confirming price reversals.
In here I will use stochastic oscillator to illustrate this, as it is considered a lagging indicator let's see how it works below.
Stochastic combined to detect lagging in the market.
Stochastic is a lagging indicator looking at the chart you will understand that price has already moved before it was confirmed by stochastic oscillator this action can increase risk in the market.
There is a movement from the uptrend downward while stochastic is pointing upwards, this can amount to expanciation of stop loss and take profit, in this lagging period timeless trades can be executed later than the period it was originally intended to.
To avoid a pitfall in this synerio all you need do is to minimize lag thereby using a short indicator periods, like the RSI-7 and not 14, the settings has to be changed.
Place more emphasis on the higher time-frame like 4 hour's and the daily timeframe, this will help you get clearer view on how to approach the lower timeframe.
Use market structure, price action price formation higher high and higher lows in this context divergence will surely be supplemented.
- Place more emphasis on the fundamental aspect of trading, News has a way of influencing the performance of asset's in the market, doing all this thing's you won't fall inside a pit.
- Risk of Missing Vital Trend.
Trading divergence can persuade a trader to miss a strong trend this can be as a result of
Focussing on only divergence alone thereby missing quality reversal to either buy or sell to maximize profit
Divergence can mislead it can produce false signals thereby making you leave the market, closing your trade not knowing that there is a strong trend emanating.
false signals, I left the market at this point.
Price was coming down, and stochastic oscillator was point downward which is a clear phase of misplaced priority, I was confused I left the market then later price went upwards, this made me to miss good and quality trends.
I'm using the stochastic oscillator here it is a lagging indicator, as you can see from the chart entries and exit's are very much delayed.
Divergence places more emphasis on constraint trading this makes trader to analyze against trend fluidity.
To avoid falling into a pit some caution's has to be instigated in the volatile crypto market and they includes.
i. Combine trend with an indicator like the moving Average, moving average is seeing as a trend following indicator, and not a lagging indicator.
ii. Monitor the higher time-frame, you can choose for yourself according to your trading strategy, you are free to go with 4 hour's time frame as the case maybe.
iii. Make a concise evaluation when it comes to the indicator settings, let there be some changes to optimize your trading plan.
iV. Make use of price action for your analysis, it will for sure supplement divergence.
V. Make sure you input stop loss and take profit in some cases, to mitigate risk management.
- Vi. Monitor the phase of the market thereby changing market condition if need be, monitor the market to detect entry and exit points.
- Limited profit potential.
With divergence there is a high poderlity of limited profit, this may be as a result of.
i. divergence places more emphasis on reversal's as we all know by doing so profits maximization from the volatile market is limited.
ii. Trading divergence be rest assured of quick reversal's, it works effectively while trading scrapping in the market.
iV. With divergence trading, there is a frequency in trading as most trader's usually target small profits.
To avoid losses and falling into the pit when it comes to the volatile market you need consider thing's like.
i. You should combine divergence with other oscillator which aren't a lagging indicator for example the moving Average.
ii. Your take profit margin should be very wide, not setting it Closer to the position where you entered.
iii. Scale the market, use snipper entry to catch up the short Signals by doing this you make good profits in the end.
iV. Considering multiple time-frames, analyze the higher time-frame, come down to the lower timeframe and place your trade. By doing all this thing's trust me you will win in this volatile market and not fall into the pit.
Include best practices for using divergence as part of a comprehensive trading plan.
Best practices depends on the individual trading strategy, when good implementations are done trading becomes very accessible, anything without a plan amounts to nothing.
i. Comprehensive Trading plan; if you fail to plan you have already planned to fail, before trading you should first define your trading plans and goals, not neglecting the risk management involved. Before you proceed predetermine market structure remember price don't just move in a straight line, there are always up and downs as price moves in a Zig-Zag form, be it as it may this will make you detect your entry and exit point's in the market, by so doing you monitor your plans and make adjustments if need be.
Adequate Risk management structure: In life everything is risk, during trading same thing is applied as well, in this case proper stop-loss should be placed below the price and take profit above the market price at this synerio every drawdown can be managed effectively incase trade goes against you, your position size too should be properly managed, don't place trade more than your overall equity.
Pre Trading Analysis; highlight market context like the consolidation phase, double top, double bottoms, potential breakout, volatility etc, before entering your trades thereby confirming it using multiple indicator's, analyze market structure, chart pattern and generally price action.
Conclusion.
- Writing this post i mentioned that divergence occur's when the market moves in opposite direction contradicting the indicator been used, meaning market trends can be moving in linear phase while the technical oscillator is moving in a total different direction, when this happen's we can bodily say divergence has occurred.
- I also highlighted forms of divergence where I talked about bullish and bearish divergence, I explained extensively using various chart's, no sourced image, I also talked about how to reduce false signals, general I attempted all the questions, Many thanks to you all .
Cc @Kingcent.