How can you effectively identify divergences using trend identification methods? (2024)

Technical analysis is awesome to welcome multiple ideas and such is divergence that spots the disagreement between price action and indicator.And of which, moving average is not one of the indicators that can spot divergence, MA is great at trend and momentum identification and guage but not divergence, kindly note.

If you build something like what is mentioned above and automate it do all kinds of testing and put it in live, it's a good way to lose a lot of money. Alpha of these have perished long back and these do not perform in the long run statistically.Better use this as a base and play with price.Thanks

Simple Moving Averages (SMA) are among the most commonly used indicators in trading, and traders employ them in various ways. From my personal experience, the 20-day SMA in daily charts has been one of the most successful indicators for identifying momentum. The 200-day SMA is the best for pinpointing good entry points for my investments.Both divergences play a significant role in interpreting market movements. The larger the divergence between price action and the moving average, the stronger the trend it signifies. This can result in profitable trades, especially when the moving average is retested.

One of the best ways to identify divergence along with the trend is to club it with Momentum.RSI gives wonderful results with this. When there is a divergence in Price and RSI then the probability of reversal is higher.For instance: In a falling market if Price made lower low but RSI either made equal low or rather Higher low that can be a strong SIGNAL for temp bottom. Risk reward comes in favourHere is the point to note, divergence does not give confirmation it only gives indication that if divergence works so a good reversal can followDivergence made after a fall is called a bullish divergence and after a rise is known as bearish divergenceBullish divergence works wonders for RSI below 40 and Bearish Divergence for RSI above 60

The content on the left is totally wrong. You don't spot divergences using a moving average as the latter is a trend-following indicator that *always* follows the price. Any bounded oscillator such as RSI, MFI, CCI is used to spot divergence. Firstly, look for an established trend (up or down) as divergences work better at the extreme ends. If in an uptrend, the price is making higher peaks but the corresponding oscillator fails to do so, then there is a bearish divergence emerging which leads to the possibility of a downtrend. Similarly, if in a downtrend, a lower trough than the previous one by the price is not followed by the oscillator, a bullish divergence is occurring. These signals are one of the best reversal signals.

Trendline is a technical tool that can be borrowed to mark the tops or lows of the candles and indicator to identify what type of divergence we are looking at. So it plays a major role too for those traders that can not spot it with naked eyes on the chart.

Drawing trendlines can be a bit tricky, and it's challenging to make them very accurate since they are manually created. However, when a trendline is broken, it often signals a powerful reversal move. This is one of the strongest setups, especially when it comes with a significant price range.To confirm the trendline break and time the entry, I use several indicators. Volume, candlestick patterns, and the 9EMA (Exponential Moving Average) on the trade line are essential elements in my strategy to time these trend moves.

One thing I have found helpful is looking at the length of moves between swings. If we see that the swings are getting further and further apart than we are increasing momentum, and if the swings are getting closer together then we are decreasing momentum. I like to think of it like a tennis ball being thrown in the air that will slow down before reversing and heading back towards the ground

Some popular technical indicators that are used to identify divergences include:MACD,RSI,OBV, Chaikin Volatility.Here are some tips for effectively identifying divergences using trend identification methods:Use a longer timeframe. Divergences are more reliable on longer timeframes.Consider the market context. Divergences are more likely to be valid signals if they occur during a strong trend.Use multiple indicators. Combining multiple indicators can increase the reliability of your signals.Don't trade based on divergences alone. Divergences should be used as part of a broader trading strategy.

Trend indicators like MACD and some oscillators like RSI, Stochastic are the main indicators popularly use to spot divergence when gauge properly with price action.

Trend identification methods not only help you to identify the entry and exit points but also point out precisely about the foreseeable movement in the stock.For eg. Using support, resistence and price volume breakout we can can easily identify if any stock is moving into negative territory and to what levels. If the support levels are broken multiple times but on one occassion the volume is also high, we can easily tell that the stock is ready to breakdown and form new support.MACD's help us to identify the golden cross and dead cross in the chart which helps us to identify if the stock is about to diverge. Generally short term MA crossing the long term MA towards down side indicates dead cross and that the stock is about to fall.

In trading, the abundance of trend indicators can lead to decision paralysis.Through my trading experience, I've found simplicity to be key. A clutter-free chart is more effective than an overloaded one.I focus on Price Action, Moving Averages, AVWAP, and RS Line (Relative Strength, not to be confused with the RSI). These tools provide clarity in decision-making.If you're seeking to streamline your trading strategy, consider simplifying your indicators. It's a game-changer. Keep it clear, keep it effective!

Trading patterns can be an effective approach to trading. Analyzing these patterns and monitoring their success rate is crucial. For instance, bull and bear flags are highly effective for intraday trading in mid and small market caps, but they may not yield as much success in larger market caps, where other patterns like level breaks and retests, trendlines, and breaks of previous day's highs or lows tend to be more reliable. Understanding these patterns, reviewing historical data, and maintaining a trading journal are key elements of successful pattern trading.

Pattern formed on the trend will determine what type of divergence is it and what it represent. price forming LL and RSI forming HL is a bullish regular divergence giving a buy signal and that is for reversal pattern which is directly the opposite of the hidden divergence which signify a continuation pattern on a trend. We can as well have a sell opportunity when we see equal highs or relative eq. highs in price and LH in RSI, that is an exaggerated bearish divergence. So there are different types and story behind the formation, courtesy of the trend, momentum and price pattern on the chart.

I use price & RSI highs/lows to spot divergence. But need to put it in perspective of where the RSI is ranging. Shorter the time-frame, higher the # of divergences needed to confirm change. See my picture post for divergence 101

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I use RSI and Stochastic majorly with my price action to spot divergence back in the days, now I spot with naked eyes all day long if I have to.Continuous learning will help to fit in in price dynamics and when to use any of the knowledge we have acquired in the market. Indeed, divergence is one of the earliest signals for a trend reversal.

Using Breadth Indicators to spot divergences: Let’s say the market is trending lower and you are looking for the bottom. One way you can increase your odds of calling the bottom is to look for a bullish divergence in a market breadth indicator, such as the McClellen Oscillator. If the market is moving lower (lower lows and highs), but the McClellan is trending higher (higher lows or even sideways), than this is a bullish divergence and odds are increasing the market will soon turn!

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Volatility Indicators are highly reliable divergence indicators, for instance when the S&P500 Index is hitting new lows but VIX not hitting new highs or vice versa. The returns of the two are inversely correlated at 70%, which makes it one of the most reliable indicators. Add to this a Realized Volatility indicator that closely mimics the VIX (which is an Implied Volatility Indicator) and one could measure whether VIX is overvalued or undervalued. These two in combination provide a higher dimensional view of market dynamics and volatility and could show any imbalances forming in the options markets, especially on the short options side. The forced unwinding of short options positions often lead to tail risk events.