ES 1-17-18 : Hot Topic

Divergence

What is it?

Read this in conjunction with the quality of divergence.

Simple definition: A divergence is when the price moves to a higher/lower point and the oscillator or indicator based on that price does not.

A bit more complex: Divergences also happen when the price moves to an equally higher/lower point while the oscillator doesn't.

A divergence occurs when:

Price makes a: Oscillator makes a:
Higher High Lower High
Lower High Higher High
Lower Low Higher Low
Higher Low Lower Low

In the first 2 instances the divergence calls for a short trade and in the second 2 it calls for a long trade. Divergences are much easier to see in diagrams:

Here are some examples of DeltaT showing divergence trades against the 1 minute ES:

ES HH and DeltaT LH = Short

ES LH and DeltaT HH = Short

ES LL and DeltaT HL = Long

ES HL and DeltaT LL = Long

Final note

Higher highs and lower lows in price with divergence are often referred to as regular divergence. Lower highs and higher lows in price with divergence are often referred to as hidden divergence.

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