Divergence Trading With Stochastics
One of the most popular ways to use Stochastics is divergences. A divergence takes place when the price and the stochastics diverge from following the same path. For example, if the price makes a new low but the stochastics don't, it is a divergence. In the same way, if the stochastics make a new high and the price doesn't, it is again a divergence.
Now, you can spot a divergence on a daily chart. You can also spot a divergence taking place on a weekly chart but there is a difference. Divergence on a daily chart means short term counter trend move that might last from 2 to 4 days as a general rule of thumb.
But a divergence taking place on the weekly charts means something more powerful. It means an intermediate trend change, something more powerful than a short term counter trend move on the daily charts.
Divergences do predict trend changes but it is important for you to realize that you can't simply buy or sell when the divergence takes place as the change does not happen instantly after the divergence. It can take sometimes for the trend change to happen. However, these divergence on the daily and the weekly charts can be traded very profitably if you know when to enter and exit.
But when %K line changes direction but is unable to cross the %D line before changing its direction back to the original direction, ignore this signal.
Similarly, if you are not in a trade and you spot a divergence, get ready to enter the market in the direction that the direction is predicting.
In case you are long or short and you spot a divergence appearing simply exit the market on the first best opportunity like the appearance of the reversal bar pattern etc! Whatever, stochastics is an interesting technique. Learn how to use them properly and profitably.
As soon as you spot a divergence on the daily or the weekly chart, get out of any position that you are in on the first best opportunity.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Try these Forex Signals by two top gun traders in a friendly competition. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade.
by: Ahmad Hassam
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Word Count: 355
Date: Mon, 6 Dec 2010
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