A standard divergence is when price trends a new swing low but the oscillator diverges by generating a higher low. This is known as a bullish divergence and is believed to be bullish by a majority of traders. A reverse divergence is when the oscillator produces a lower swing low while price makes a higher swing low. This is usually a bullish predicament and typically comes prior to a rally.
Reverse divergence trades are considered a lot more reliable than standard divergence trades as you are going to be often trading within the direction of the prevailing trend. In other words, a bullish reverse divergence will form in the path of the trend while an ordinary bullish divergence will be against the trend in a shot to pick a bottom.
One way where it is most effective to take advantage of reverse divergence setups is to locate a 50 bar moving average on the chart beside your favorite oscillator, for example, the stochastics . In reality, a trade setup, I am looking for a rising 50 bar moving average. This will define an uptrend for the present time. I then will wait for the series of pullbacks in the market. What I am searching for is a higher swing low in price action but having a drop lower in the oscillator. This is really a bullish reverse divergence and sets the stage for a possible rally. Now all you waiting for is often a trading signal as a trigger to enter in the market. What you typically would lik to see is for the market to take away the highest high with the last three bars. When the market has performed that you should enter the market using a protective stop just below the most recent low.
Though this sytem has a very easy setup but don’t let that fool you as it can be highly lucrative if traded consistently which can be the key to success.
Mail this post
Posted in 
Tags: 
trading…
[...]Trade Utilizing Reverse Divergences[...]…