There are 9 major rules pf divergence trading. In order to be successfully identify a divergence and to be able to profit off of using them we are to follow every step:
Make sure you see the divergence clear. In order for the formation to be called a divergence one of these must be present: Higher high than the previous high, lower low than the previous low, double top or double bottom.
Draw the lines only on successive tops and bottoms
Connect tops with tops and bottoms with bottoms – only like this and not in any other way.
As soon as you drew the line in the indicators – compare it the price movements. Be sure to compare tops with tops and bottoms with bottoms here as well.
If you connect highs or lows in the chart, connect them in the indicators as well – your graphs and indicators have to match.
Look for vertical similarities – highs and lows you identify on the indicator MUST be the ones that line up with the price highs or lows.
Similar slopes – divergence can only exist is the slopes which are connecting the highs and lows. Slopes can be ascending, descending and flat.
Better wait for the next one – in case you spotted a divergence too late and the price already reversed, you need to wait for another one – do not get on the ship that has already sailed. You’ll drown.
Take your time – it is better to wait for the divergence signals to confirm themselves. They tend to be more accurate with time passing. Although in the short period of time divergences are more frequent, they are not nearly as accurate.
Draw the lines only on successive tops and bottoms
Connect tops with tops and bottoms with bottoms – only like this and not in any other way.
As soon as you drew the line in the indicators – compare it the price movements. Be sure to compare tops with tops and bottoms with bottoms here as well.
If you connect highs or lows in the chart, connect them in the indicators as well – your graphs and indicators have to match.
Look for vertical similarities – highs and lows you identify on the indicator MUST be the ones that line up with the price highs or lows.
Similar slopes – divergence can only exist is the slopes which are connecting the highs and lows. Slopes can be ascending, descending and flat.
Better wait for the next one – in case you spotted a divergence too late and the price already reversed, you need to wait for another one – do not get on the ship that has already sailed. You’ll drown.
Take your time – it is better to wait for the divergence signals to confirm themselves. They tend to be more accurate with time passing. Although in the short period of time divergences are more frequent, they are not nearly as accurate.
