A divergence does not always cause a robust reversal and sometimes price just enters a sideways consolidation after a divergence. Keep in mind that a divergence just signals a loss of momentum, but does not necessarily signal an entire trend shift.
1. Make sure your glasses are clean
In order for a divergence to exist, the worth must have either formed one among the following:
- Higher high than the previous high
- Lower low than the previous low
- Double Top
- Double Bottom
2. Draw lines on successive tops and bottoms
One will only see one of four things: a higher high, a flat high, a lower low, or a flat low.
Now draw a line backward from that high or low to the previous high or low. It has to be on successive major tops/bottom.
3. Connect TOPS and BOTTOMS only
Once two swing highs are established, connect the TOPS. If two lows are made, connect the BOTTOMS.
4. Keep Your Eyes on the Price
Whichever indicator one employs, he or she is comparing its TOPS or BOTTOMS. Some indicators such as MACD or Stochastic have multiple lines all up on each other.
5. Be according to the Swing Highs and Lows
If the trader draws a line connecting two highs on price, he or she must draw a line connecting the two highs on the indicator as well.
6. Keep Price and Indicator Swings in Vertical Alignment
The highs or lows the trader identifies on the indicator must be those that line up vertically with the worth highs or lows.
7. Watch the Slopes
Divergence only exists if the slope of the road connecting the indicator tops/bottoms differs from the slope of the road connection price tops/bottoms. The slope must either be- Ascending (rising) or Descending (falling) or Flat (flat).
8. If the ship has sailed, catch subsequent one
If one notices divergence but the worth has already reversed and moved in one direction for a few time, the divergence should be considered played out.
9. Take a Step Back
Divergence signals tend to be more accurate on the longer time frames. One gets less false signals.