Trading Divergences

One of my favorite tools when spotting possible reversal or retracement are divergences. It maybe hard to spot on at first but when you train your eyes to always look for it then it'll just become a second nature to you. So here's a guide on how to spot divergences:
  • You could spot divergences using MACD, RSI or Stochastic (I personally use RSI) and compare it to price action. And for it to exist, price must be making higher highs or lower lows.
PPC made Higher High

CAL made Lower Low

  • You need to draw lines starting from Previous High or Previous Low to the new Higher High or new Lower Low.  In our example above, PPC made a new higher high while CAL made a lower low. The key here is to learn how to connect the tops and bottoms only. 
  • Once you're done connecting the  tops or bottoms, you can now use your preferred indicator. Do the same thing, connect the tops or bottoms IN LINE with the PRICE (you can draw vertical line like what I did on our example so we can really be sure that it's in line with the price).
 RSI made Lower high
RSI made Higher Low

  • From our examples above, the slopes connecting the price differs from the slopes connecting the peaks or lows of  our oscillator (ascending, descending or flat) thus, making a DIVERGENCE. PPC made a Bearish Divergence while CAL made a Bullish one.
  • So what happens after these divergences were spotted on our charts? 
If you missed to notice the bearish divergence of PPC and bought it at 4 php level and sold it at 3.5 area when the bearish confirmation happens, then you already made -12% loss on this trade alone. But I think, this still worth to watch as the price held at the previous resistance now turned support. Who knows? maybe this was just a retracement for a possible bigger moves on the weeks to come. ;)

If you were able to spot this bullish divergence at the support area, bought it at 3.2 and still holding it till now, then you're already making 30% paper gain in your portfolio! :) 

And here are the current stocks worth to watch that I spotted this week making divergences:

Crown is making Higher Low while its RSI is making a flat slope creating a Hidden Bullish Divergence in confluence of  the doji sitting at 38.2 Fibonacci retracement. We'll see if this will make a bullish confirmation on the days to come! :)

SSI has been making steep downward moves these past few days, then it held at the major support level plus Regular Bullish Divergence was spotted on August 14. Will this retrace at 38.2 Fibonacci level in confluence of the previous support turned resistance for a possible bounce play? or will it continue to move downwards making a new ALL TIME LOW? If this formed SOR candle this week, then it might be a good sign. We'll see. 

For now, what you need to spot on your next trades are something like these:

You can see that hidden divergences like in CROWN can be used in spotting a possible trend continuation while the regular divergences like in the previous examples can be used for possible retracements or even reversals. 

Divergence trading is really one of my most reliable and dependable tools that I always use in confluence of other indicators since it's a leading indicator, it gives you signal that there's something fishy is going on and you must be ready to pull that trigger any time soon! :) 

God bless and Happy Trading! :)