Different Classes Of Divergence

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1 Russ Horn Presents Different Classes Of Divergence

2 RISK DISCLOSURE STATEMENT / DISCLAIMER AGREEMENT Trading any financial market involves risk. This report and all and any of its contents are neither a solicitation nor an offer to Buy/Sell any financial market. The contents of this material are for general information and educational purposes only (contents shall also mean the website or any website the content is hosted on, and any correspondence or newsletters or postings related to such website). Every effort has been made to accurately represent this product and its potential. There is no guarantee that you will earn any money using the techniques, ideas and software in these materials. Examples in these materials are not to be interpreted as a promise or guarantee of earnings. Earning potential is entirely dependent on the person using our product, ideas and techniques. We do not purport this to be a get rich scheme. Although every attempt has been made to assure accuracy, we do not give any express or implied warranty as to its accuracy. We do not accept any liability for error or omission. Examples are provided for illustrative purposes only and should not be construed as investment advice or strategy. No representation is being made that any account or trader will or is likely to achieve profits or losses similar to those discussed in this report or anywhere on Past performance is not indicative of future results. By purchasing any content, subscribing to our mailing list or using the website or contents of the website or materials provided herewith, you will be deemed to have accepted these terms and conditions in full as appear also on our site, as do our full earnings disclaimer and privacy policy and CFTC disclaimer and rule 4.41 to be read herewith. So too, all the materials contained within this course, including this manual, whether they appear on our domain(s) or are in physical form, are protected by copyright. "Warning: The unauthorized reproduction or distribution of this copyrighted work is illegal. Criminal copyright infringement, including infringement without monetary gain, is investigated by the authorities and is punishable with imprisonment and a fine." We reserve all our rights in this regard. Old Tree Publishing CC, in association with the website, content, and its representatives do not and cannot give investment advice or invite customers or readers to engage in investments through this course or any part of it. The information provided in this content is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject us to any registration requirement within such jurisdiction or country. Hypothetical performance results have many inherent limitations, some of which are mentioned below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and actual results subsequently achieved by any particular trading program and method. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program or system in spite of the trading losses are material points that can also adversely affect trading results. There are numerous other factors related to the market in general or to the implementation of any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance results. All of which can adversely affect actual trading results. We reserve the right to change these terms and conditions without notice. You can check for updates to this disclaimer at any time by visiting Governing law: this policy and the use of this report/ebook, provided in any form, and any content on the website are governed by the laws of the Republic of South Africa. Further details on this are found under the Terms and Conditions on our site. Please ensure you read and agree with all Terms and Conditions as set out on our site before using any of the materials. Your use and reliance on the materials is based on your acceptance of such Terms and Conditions and policies as appear on the site. 2

3 Divergence Divergence is a powerful tool a trader can use to help determine if the market will change direction, or if it will NOT change direction. You may be familiar with divergence, but just in case you're not, divergence can be defined as: An indicator and price action being in disagreement. The indicator will refer to an oscillator of some kind, and indicator in its own window that moves up and down. The most common ones are the MACD and the Stochastic Oscillator. The examples in the short manual will use the MACD, mainly the histogram part. This is the most commonly used tool to identify Divergence. The purpose of this manual is not only to show off the different types of divergence, but also to show you what class they are. Some divergence is better than others, and as such, have earned a letter classification. There is: Class A Class B Class C Class A divergence is the best kind with the highest probability of success. Class B also (in my opinion) has a high probability of success, but is generally thought of as not quite as good. Class C divergence is a low quality type of divergence, it's one that I don't trade. 3

4 "Class A" Divergence This is the type of divergence that has the highest probability of success. There is a trend reversal and a trend following kind of divergence that can be classified as Class A. Class A Divergence has a high follow through rate, this means that when it shows up, the market will usually do what the divergence is telling us the market is going to do. There are 2 kinds of Class A Divergence: 1. Regular Divergence. This is a counter-trend divergence. The market will change direction as a result of Regular Divergence. 2. Hidden Divergence. This is a trend-following kind of divergence. Once the market has established a trend direction, Hidden Divergence suggests that the market will continue to move in the trend direction. 4

5 Regular Divergence Regular Divergence is the divergence type that most traders are familiar with. It's a trend reversal type of divergence signal, it leads to the market changing direction. This change of direction can range from a sideways market to a sizeable pullback to a complete change in the overall trend direction. Regular Divergence shows us that the market no long has much momentum left. We will see on the chart that the market is still moving in a certain direction, but the presence of Regular Divergence shows us that behind the scenes, the market is losing its momentum and can no long sustain that movement in that direction. Regular Divergence is a weakness in the trending direction. 5

6 Regular Bearish Divergence When the Market is making a HIGHER HIGH, the indicator is making a LOWER HIGH. This is an indication to the weakness in the market that will lead to a reversal, specifically, a move downwards. The term "bearish" describes the downward market direction as a result of the divergence. In the image below you will see the price making a higher high. The MACD histogram is making a lower high. The divergence is present on the corresponding peaks of the price. For each peak the price makes, there will be a MACD peak associated with it, these associated peaks are what we look at to find the divergence. As a result of this bearish divergence, the price drops. 6

7 Regular Bullish Divergence When the Market is making a LOWER LOW, the indicator is making a HIGHER LOW. This is an indication to the weakness in the market that will lead to a reversal, specifically, a move upwards. The term "bullish" describes the upward market direction as a result of the divergence. In the image below you will see the price making a lower low. The MACD histogram is making a higher low. The divergence is present on the corresponding valleys of the price. For each valley the price makes, there will be a MACD valley associated with it, these associated valleys are what we look at to find the divergence. In this example, the second MACD valley is not red like the first. This is ok, as long as there is a low of some kind that relates to the low the market is making. In this example, you can see the low as a cutout of the green histogram. As a result of the bullish divergence, the market rises. 7

8 Hidden Divergence Hidden divergence is aptly named. This is a type of divergence that is missed by most traders. They cannot see it as it hides on the wrong side of the market. Hidden Divergence is an indication that the trend is not over and still has some steam, or momentum, left. Hidden Divergence is also known as "Slingshot Divergence". It's as though the market is gaining back some strength, or momentum, to be shot off in the trend direction. Hidden Divergence gives our trend following trades the extra confirmation that we are taking the right position. 8

Hidden Bearish Divergence In a downtrend, Hidden Bearish Divergence will suggest a continuation of the downward movement. The price will make a LOWER HIGH as the indicator makes a HIGHER HIGH.

9 Hidden Bearish Divergence In a downtrend, Hidden Bearish Divergence will suggest a continuation of the downward movement. The price will make a LOWER HIGH as the indicator makes a HIGHER HIGH. This the market momentum gaining some of its strength back and will want to make another push downwards. As a result of the Hidden Bearish Divergence, the market continues to move downwards. 9

10 Hidden Bullish Divergence In an uptrend, Hidden Bullish Divergence will suggest a continuation of the upward movement. The price will make a HIGHER LOW as the indicator makes a LOWER LOW. This the market momentum gaining some of its strength back and will want to make another push upwards. As a result of the Hidden Bullish Divergence, the market climbs. 10

11 "Class B" Divergence This type of divergence has a good probability for a successful trade. Class B Divergence is also something I call "Exaggerated Divergence" when the divergence is quite pronounced or extreme. Class B Divergence is essentially a divergent Double Top or Double Bottom chart formation with a NON double top or double bottom indicator. 1. Double Top. The price is making a similar first and second high but the indicator is making a second high that is lower than the first high. 2. Double Bottom. The price is making a similar first and second low while the indicator is making a second low that is higher than the fist low. 11

12 Divergent Double Top The price will make a high followed by a similar high to form a double top. This second high needs to be close to the same level as the first high, but it's no important that it's exact, it can be a little higher or a little lower. It does have to look like the market did make a really good attempt to meet it. However, the second high on the indicator will have made no attempt at all to meet the level of the fist high it made. The first high will me much higher than the second high... or put another way, the second high will be much lower than the first high. This failure to make any real attempt to make a second high is where the term Exaggerated Divergence comes from. The Double Top with the Exaggerated Divergence results in a drop by the market. 12

13 Divergent Double Bottom The price will make a low followed by a similar low to form a double bottom. This second low needs to be close to the same level as the first low, but it's not important that it's exact, it can be a little higher or a little lower. It does have to look like the market did make a really good attempt to meet it. However, the second low on the indicator will have made no attempt at all to meet the level of the fist low it made. The first low will me much lower than the second low... or said another way, the second low will be much higher than the first low. The Double Bottom with the Exaggerated Divergence sends the market shooting upwards. 13

14 "Class C" Divergence Class C Divergence is not a very good kind of divergence. It can at times send the market in the direction you think it will go, but it's largely unreliable. It IS divergence to some degree, so it does qualify for a divergence class. It is the bottom of the scale, but it's on the scale. There are 2 kinds of Class C Divergence types: 1. Class C Divergence. The market is making higher highs or lower lows, but the indicator is making a double top or double bottom. 2. Rolling Divergence. This is a single high or single low kind of divergence. As the market continues to rise or fall, the indicator turns and moves in the opposite direction of the market. 14

15 Class C Bullish Divergence The price will make a lower low while the indicator makes a double bottom. This doesn't really show the market is going to make a change, it simply shows that the momentum that the market has to keep pushing hasn't really changed. It hasn't decreased as we would like to see in Regular Divergence. The move the market makes after Class C Divergence is going to be questionable. As a result of the Class C Divergence, the market makes a mediocre attempt to move back up, but isn't very successful. 15

16 Class C Bearish Divergence The price will make a higher high while the indicator makes a double bottom. As the market rises, the MACD Histogram creates a double top showing us that the momentum hasn't changed too much. It hasn't increased but it hasn't decreased either. Without and change in the momentum, we don't have a clear idea what can happen next. The market did make something of a pullback, but not something that we would have made much money on. Chances are this trade would have resulted in a loss, or break even at best. 16

17 Rolling Bearish Divergence This is an interesting kind of divergence. With every other kind of divergence, we need to compare tops and bottoms. With Rolling Divergence, we are looking at the single leg of a market and comparing it to the movement of the indicator. Rolling Bearish Divergence sees a market climbing but the indicator begins to fall during the market climb. This shows weakness in the market, and as a result the market should turn around and fall. The trouble with Rolling Divergence is determining the turning point of the market. We know there is weakness in the upward momentum, but the turn hasn't happened yet. Trendlines work best when you can connect 2 distinct lows, in this case, the market bottom is too smooth to create an effective trendline, so closes below it will often be fake outs. 17

18 Rolling Bullish Divergence Rolling Bullish Divergence sees a market falling but the indicator begins to climb during the market drop. This shows weakness in the market, and as a result the market should turn around and move back up. Half the time Rolling Divergence has the ability to work, the other half it doesn't move the market much. This less than desirable result puts it into the Class C category. 18

19 Conclusion Divergence is an awesome tool to know about. Most major turns in the market are heralded by Regular Divergence. Regular Divergence, Hidden Divergence and Double Tops / Double Bottoms with the presence of divergence are all setups you should be aware of. Look for them and start to use them to help you in your market assessment. They will help you make better and more informed trade decisions. If there is one out of all of them you should learn, learn Regular Divergence. It's the most common one and it's easy to see on the charts. If you can't see Hidden Divergence, or Exaggerate Divergence, that's ok. You don't need to know them all to be successful, but if you can learn them, that's obviously ideal. Best of luck to you and in your trading career! 19

Counter Trend Trades. (Trading Against The Trend) By Russ Horn

Counter Trend Trades. (Trading Against The Trend) By Russ Horn Counter Trend Trades (Trading Against The Trend) By Russ Horn 1 RISK DISCLOSURE STATEMENT / DISCLAIMER AGREEMENT Trading any financial market involves risk. This report and all and any of its contents