Before you look for potential divergence patterns, you need to keep in mind the following 9 rules about divergence trading.
We need to learn them, remember them, and use them to help you make better trading decisions. Ignoring their existence may lead to a burst of personal accounts.
Make sure your glasses are clean
In order to determine the formation of divergence, the price needs to form one of the following forms
· The high is higher than the previous high
· Lows are lower than previous lows
· Double top
· Double bottom
Before the above four situations appear, do not rush to observe the relevant technical indicators. If the price has not formed any of the above four patterns, you’d better not to diverge. If you insist on doing this, you are just imagining it out of thin air. I suggest you visit your optometrist and let him re-pair your glasses.
Line drawing connects continuous top or bottom
Closely observe the recent trend of the exchange rate. Remember, you will only see four scenarios: a higher high, a high that is the same as the previous high, a lower low, or a low that is the same as the previous low.
Now, all we have to do is draw a straight line from the new high or new low, connecting the front high or front low. The pattern formed by the price must be a continuous main top or bottom. If you see only small peaks before the two main highs, or small troughs before the two lows, all you have to do is stick to your own opinions. When someone yells at you, it’s best to ignore Their opinions.
Do the right thing-only connect consecutive top or bottom
Once you see the price forming two band highs, you connect the top with a straight line; if you see the price forming two band lows, please connect the bottom with a straight line.
When you see prices forming higher highs, don’t try to draw a straight line connecting the lows at the bottom.
Follow price trends
You have connected two consecutive tops or bottoms with straight lines. Now, you can observe your usual indicators and compare them with price movements. No matter what indicator you use, remember that what you are comparing is its top or bottom. Some indicators, such as the MACD indicator or the stochastic indicator, can draw multiple straight lines connecting highs or multiple lows. Don’t worry, all you have to do is pay attention to the indicator lines corresponding to the straight lines connecting the top or bottom of the price.
Follow price trends
You have connected two consecutive tops or bottoms with straight lines. Now, you can observe your usual indicators and compare them with price movements. No matter what indicator you use, remember that what you are comparing is its top or bottom. Some indicators, such as the MACD indicator or the stochastic indicator, can draw multiple straight lines connecting highs or multiple lows. Don’t worry, all you have to do is pay attention to the indicator lines corresponding to the straight lines connecting the top or bottom of the price….
Prices and indicators remain the same
The highs or lows of the indicator must be aligned with the highs or lows of the price on the same vertical line.
Observe the trend of the inclined line
Divergence will only occur if the slashes connecting the top/bottom of the indicator and the slashes connecting the top/bottom of the price are inconsistent. The slope line must be one of the following three cases: rising line, falling line or horizontal line.
Once missed, wait for the next opportunity
If you have painted a divergence pattern, but the price movement has turned around at this time and is running in the direction of the reversal once the time has passed, then this time you have missed the opportunity to diverge. All you can do is to wait for another interval high/low to form and start your journey of finding divergence again.
Choose a long time range for divergence trading
The longer the time range, the more accurate the deviation signal from the graph. This means that you will make fewer trading lots, but if you build your trading system well, your profit will be huge. Divergence occurs more frequently in a short time frame, but the credibility is also lower.
We only recommend investors to trade divergently on the 1-hour chart or longer. Other traders use 15-minute charts or even shorter timeframes for divergence trading. We will encounter too much noise when trading divergences in a shorter time frame, so we better stay away from trading divergences in a shorter time frame.
If you are seriously considering trading with divergence patterns, you must keep in mind the above 9 rules. Trust us, don’t ignore the existence of these 9 rules.
If you follow these rules, your chances of setting up a complete divergence trading system to obtain considerable gains will increase greatly.