How To Trade Divergence – KEY TRADING

TIPS!
By
Vladimir Ribakov
-
January 27, 2021
0
1372
Watch the webinar of How To Trade Divergence – KEY TRADING TIPS!

Hi Traders! In this article, I would like to show you the real power behind trading
divergence. I will explain how you can trade short term trades against higher time frames
direction, for example – short term sells, vs. longer-term buys.

What is Divergence?
Divergence is a situation where the price and the indicator are pointing in opposite
directions. When that happens, the indicator basically indicates to us that the buyers or
the sellers, depending on the ongoing trend, are losing their power and a trend might
stop and reverse.. The forex trading divergence strategy employs the use of any suitable
oscillator such as the Relative Strength Index (RSI indicator) or the Moving Average
Convergence Divergence (MACD indicator). The oscillators used for this strategy could be
found on the MT4 or MT5 platforms or any other trading platform.

Note: If you want to learn more in-depth insights about divergences, you can
benefit greatly from the videos on my channel here while also embarking upon
Divergence University for comprehensive divergence education.

Example
In order to explain how to possibly take a short-term trade against a long-term direction. I
will present you an example (Silver) that we’ve discussed, and traded in my Traders
Academy Club.

On the table below you can see my trading watch list. This list is all the trading
opportunities I share with my followers on daily basis, in Traders Academy Club (you can
join us here).
Multi-timeframe Analysis

First, let’s start with Multi-time frame analysis which is a key to your success in trading.
Knowing what is going on in the longer-term increases the probability that you are trading
in the right direction. You don’t want to be stuck in a situation where daily, and weekly
charts are in a strong bearish trend, without any signs for reversal, while at the same time
you are attacking the H4 chart for buys. Chances are, it will end badly.

We will start our analysis from the daily chart which will be the highest timeframe in this
multi-timeframe analysis. Looking at the daily chart, I found a bullish trending pattern to
the upside followed by a pullback, in a format of ABCD correction, and the area shown in
the screenshot below becomes a massive support area. There is a bullish divergence
based on the moving averages of the MACD indicator and also on the RSI indicator. Later
on the price moved higher and broke above the most recent downtrend line.
Then I moved down to the H4 chart where we can see the price gaining momentum by
creating three higher highs, higher lows. This by itself is another very strong bullish sign
because in a bullish trend the buyers manage to create higher highs, higher lows, that is
how we know the buyers are likely in control. So our longer-term idea is to get the
pullbacks, ideally towards the next important rejection zones shown in the screenshot
below, and afterward, we will be looking for buy setups. We can’t guarantee that we will
have such setup at the end, but I do always build a plan to trade, and then I am looking to
trade my plan.

But meanwhile, why not to enjoy a short term sell trade here – right? Let me explain why I
can do that in this case. The three higher highs, higher lows is a trending pattern but in
this case it’s also a full cycle by itself (as I can see each of the legs are built by several
waves to the upside which is a great sign) with a clean ending bearish divergence. As it is a
completed cycle, and I expect to see pullbacks here, let’s see if I can trade these pullbacks.

The next step here is, I go to a shorter timeframe (in this case H1 chart) this is where the
real power comes into play. If we take a look at the last leg from the H4 chart on how it
ends, we have a false breakout of the last high, and then we had another attempt to
create higher highs which again turned to be another false breakout. All this is followed by
a massive bearish divergence.
Also, after the uptrend where the price was creating higher highs, higher lows for the first
time the price has changed and has created lower lows. This together with the analysis
from the multi-timeframe we get an understanding that we need to experience a pullback
here before possible longer-term buys, which allows me to trade short-term
opportunities.
Now, we don’t know what sort of setup we will get here, normally we either get ABCD
pattern followed by the breakout of the most recent uptrend line.
Or alternatively, we may get any sort of a range.
The price was at the end ranging here, and if the price breaks below the bottom of this
range I assume that we are going for the correction aiming to the next critical rejection
zones.
Then we got the breakout coming in play and the price validating the zone shown in the
screenshot below.

How do I know the price validates this zone?

In order to find this, you can always go to a lower timeframe and see that the price is
gaining momentum with the breakout. On the M15 chart, we can see that the price is
gaining the momentum in the form of three lower highs, lower lows. This is a good
verification which shows that the momentum is gaining.
As we discussed before, we are aiming for the first rejection zone and we follow the price
action. I can’t predict until which zone the market will reach, but I do can follow the facts
and if the market shows signs of stopping, I close my position. I do know that if I reach the
first rejection zone I will be in a good risk/reward, and I am looking to enjoy my profit.
Why Good Risk/Reward ratio is important?

Positive risk-reward guarantees you that even if you have same amount of losses as you
have profits, you will still make money. How is it possible? A risk-reward ratio in general
means the relationship between the potential loss and the potential profits. Meaning – for
every $1 that you are going to risk, what is your potential profit? If it is a positive risk-
reward, then for 1$ risk you aim to make more than 1$, and with 50% success rate only,
you’ll still make amazing profits.

Key Tips To Trade Divergence

Stick to the higher time frames (at least in the beginning while you are still a newbie) –
apply multi time frame analysis to your trading. The combination between divergences
and cycles is amazing! You will be surprised how accurately tops and bottoms are
identified – Use strong resistance and support or rejection levels. This is helpful for pretty
much any trading strategy.

Using false breaks.

The false break pattern in its nature suggests that the momentum is losing its power. This
is exactly what the divergence is telling us. False breaks is a great sign to follow when it
comes to divergences.

MACD divergence

When using MACD indicator we can spot divergence on the moving averages as well as
the histogram. When the divergence appears on both at the same time, it is a
confirmation for a stronger signal.

Divergence on both RSI and MACD?

Why not? Actually, it is even better as we have another confirmation. Now what if we have
MACD histogram + MACD moving average + RSI divergence at the same time? You just
have better chances to end up as a winner at the end of the trade

Short term divergence

As the market moves in cycles on each time frame we see the different time frames
completing those cycles and forming divergences. You can benefit from those intraday
moves using the powerful combination of market waves/market cycles and divergences. A
short-term divergence would be considered as anything below H4 chart.

Long term divergence

Longer-term divergences are considered for any time frame above H4(Including). The H4
chart being the bridge between intraday and longer-term/swing traders might be the ideal
option for those looking to trade something in between the short term and long term.

Conclusion
So traders, this is how I trade the divergence and enjoy from both directions. This is what I
want to show you in this article, how the multi-timeframe analysis with clear divergence,
levels, and verification gives you higher probability trades. I can’t assure whether the price
will deliver that move or not, but I do know that when the multi-timeframes are
synchronized in the same direction then your odds are always higher. Because you have a
different scale of money flow and when they are synchronized in the same direction, and
provide you the same opportunity then I know that my chances to win this trade are very
high.

Vladimir Ribakov
Certified Financial Technician