Divergence traditionally has been a measure of momentum exhaustion as displayed by a disconnect between the troughs and peaks you see on your chart compared with the ones on an oscillating indicator such as the Stochastic and the MACD.
Avid Price action traders will be keen to tell you that over time its easy to see when a market should be diverging without the aid of an oscillator and that they no longer require an otherwise useless indicator to take up their chart space at the bottom of their chart screens. Generally speaking higher highs or lower lows that tend to squeeze into some kind of a pattern like a wedge come with a lot of surety of divergence. As I have come to realize it though, there is an objective way to gauge if the market is diverging by simply looking at the candles/bars for a specific pattern. This may or may not line up with conventional divergence as measured with indicators but is, quite conspicuously reminiscent of a trend losing steam.
As price approaches an important level such as a confluence area or a prior swing point look for bars filling in prior wicks without actually closing beyond the wicks.
A few words need to be reiterated from the line above:
First just like our conventional macd divergence serves us best at sweet locations, I find this pattern helpful around crucial areas and not just anywhere on a chart. Secondly we want wicks forming on bars opposite to the trend direction. So if we are looking at price in a down trend heading straight into a support zone, as price approaches it, you should start seeing wicks on the underside of your bars. Needless to say of course this means the buyers are ticking in. Thirdly you want the wicks to be filling in partially or completely without actually seeing bars closing under these wicks. (think of this like a speeding train which still travels a bit from the point you apply the brakes up till the point it actually stops) In essence the lows will start to act as support and the bars closing above them symbolize it. What's more, like with bullish divergence, a bullish pin bar now at this support zone clearly shows you it was a result of a real tip off between the bears and the bulls. :)
A couple of charts:
BTW I haven't systematized the pattern as a key trigger to a system nor would I recommend anyone else to do it, because just like conventional divergence bars can keep ticking in the direction of the current move while displaying the same pattern before price turns around. At best this should help with trade management (as price heads into trouble areas and target areas) and getting a deeper view of price dynamics in general.
I am aware that some of us are already aware of this particular market behavior but for those who aren't thought I'd carve out a post...
g.
Avid Price action traders will be keen to tell you that over time its easy to see when a market should be diverging without the aid of an oscillator and that they no longer require an otherwise useless indicator to take up their chart space at the bottom of their chart screens. Generally speaking higher highs or lower lows that tend to squeeze into some kind of a pattern like a wedge come with a lot of surety of divergence. As I have come to realize it though, there is an objective way to gauge if the market is diverging by simply looking at the candles/bars for a specific pattern. This may or may not line up with conventional divergence as measured with indicators but is, quite conspicuously reminiscent of a trend losing steam.
As price approaches an important level such as a confluence area or a prior swing point look for bars filling in prior wicks without actually closing beyond the wicks.
A few words need to be reiterated from the line above:
First just like our conventional macd divergence serves us best at sweet locations, I find this pattern helpful around crucial areas and not just anywhere on a chart. Secondly we want wicks forming on bars opposite to the trend direction. So if we are looking at price in a down trend heading straight into a support zone, as price approaches it, you should start seeing wicks on the underside of your bars. Needless to say of course this means the buyers are ticking in. Thirdly you want the wicks to be filling in partially or completely without actually seeing bars closing under these wicks. (think of this like a speeding train which still travels a bit from the point you apply the brakes up till the point it actually stops) In essence the lows will start to act as support and the bars closing above them symbolize it. What's more, like with bullish divergence, a bullish pin bar now at this support zone clearly shows you it was a result of a real tip off between the bears and the bulls. :)
A couple of charts:
BTW I haven't systematized the pattern as a key trigger to a system nor would I recommend anyone else to do it, because just like conventional divergence bars can keep ticking in the direction of the current move while displaying the same pattern before price turns around. At best this should help with trade management (as price heads into trouble areas and target areas) and getting a deeper view of price dynamics in general.
I am aware that some of us are already aware of this particular market behavior but for those who aren't thought I'd carve out a post...
g.
