Divergence Cheat Sheet

by Vaughan Kilpatrick
Its about higher highs and lower lows. If you find them in price, but not in the
oscillator, you have regular divergence. If you find them in the oscillator, but not in
price, then its hidden divergence.
Higher Highs => Short
Lower Lows => Long
At first this seemed to me like the opposite of common sense, so I had to think
about it for a while. I finally got it that it means when higher highs or lower lows in
either price or an oscillator arent confirmed by the other, then the direction
indicated by the extremes, meaning the higher highs or lower lows, is weak and is
likely to change.
If the higher highs or lower lows are in price but not the oscillator, then the
direction of price is likely to reverse. This is regular, or classic divergence and
can be used as a confirming indicator for a reversal entry.
egular divergence describes a price trend change that will probably happen in the
future, albeit shortly. !n the other hand, hidden divergence is a confirming
indicator of past price direction.
"e have hidden divergence when we have higher highs or lower lows in the
oscillator but not in price. In this case the direction indicated by higher highs or
lower lows in the oscillator is contradicted by the price trend. #nlike regular
divergence, where the weakness in price trend is about to lead to a reversal$ here
the weakness has already led to a little reversal against the trend. The hidden
divergence implies that this recent little reversal in price direction will be short%
lived and that price will resume moving in the direction of the trend. This is
exciting because it can confirm a continuation entry, which is generally much
less risky than a reversal entry. "hat you have here is the opportunity to enter on a
pullback of the current trend, which you expect to continue based on this and
whatever other indicators you choose. This is trading with the trend, nice and
friendly$ however, please heed the following warning.
Warning& I consider divergence to be an indicator, not a signal to enter a trade. It
would be unwise to enter a trade basely solely on this indicator as too many false
signals are given$ however, on the other hand, I consider it even more unwise to
trade against this indicator.
Thanks to '(oos for sharing his knowledge in the '()*+ ,altalk room and
providing so many wonderful examples of divergence in his great charts posted at
www.dacharts.com. Also thanks to -ave +hedd and .uffy for bringing us all
together and for freely and generously sharing their time and knowledge.

SUMMARY OF FOUR TYPES OF DIVERGENCE
Regular Divergence:
/igher highs in price and lower highs in the oscillator which indicate a trend
reversal from up to down.
0ower lows in price and higher lows in the oscillator which indicate a trend
reversal from down to up.
Hidden Divergence:
0ower highs in price and higher highs in the oscillator which indicate a
confirmation of the price trend which is down.
/igher lows in price and lower lows in the oscillator which indicate a
confirmation of the price trend which is up.
!n the diagram, the diagonal lines represent the trend lines drawn on a chart
showing how each of the four patterns look with price above and the oscillator
below. !n the two price lines, going either from right to left or left to right, the
reversal of the diagonal lines shows the direction to be expected by each instance of
divergence. In each of the four instances of divergence, when price is headed up,
green, chances are good it will turn down, red, and vice versa.
Copyright 2003 - Ensign Software
Another explanation
I have a special treat. Heres a short lesson on ivergences. !ivergence is "asically price
action #eas$re in relationship to an oscillator inicator. It oesnt really #atter what type
of oscillator yo$ $se. %o$ can $se &SI' Stochastic' (AC!' CCI' etc. etc. I personally $se
)s(A. )s(A is si#ply the ifference "etween the (AC! an its signal line. If yo$re
still conf$se' I s$ggest yo$ rea o$r lesson on (AC! again. *he great thing a"o$t
ivergences is tat yo$ $se the# as a leaing inicator an its pretty easy to spot.
+$st thin, -higher highs. an -lower lows..
If the price is #a,ing higher highs' "$t the oscillator isnt then yo$ have reg$lar ivergence.
If the price is #a,ing lower lows' "$t the oscillator isnt' this is also consiere reg$lar
ivergence. A reg$lar ivergence is $se as possi"le sign for a trend reversal.
If the oscillator is #a,ing higher highs' "$t the price isnt' then yo$ have hien
ivergence. If the oscillator is #a,ing lower lows' "$t the price isnt' this also consiere
hien ivergence. A hien ivergence is $se a possi"le sign for a trend continuation.
/ets loo, at the chart a"ove as an exa#ple. 0irst' notice how Ive la"ele -/ower /ows.
for price an -/ower /ows. for )s(A in p$rple. *his is the nor#al relationship "etween
price an the oscillator. If price is #a,ing lower lows' then the oscillator is s$ppose to
#a,e lower lows as well.
1ow ta,e a loo, at where Ive la"ele -/ower /ows. for price in re an also -Higher
/ows. for )s(A in re. *his is a goo exa#ple of -reg$lar ivergence.. )"serve how the
pair stoppe falling an slowly "egan to rise. *his is what I #ean "y -tren reversal..
If a pair is in a owntren an yo$ spot a reg$lar ivergence' yo$ "etter ta,e ca$tion as this
is a possi"le sign the #ove own #ight "e over an price is li,ely to reverse. If yo$re in a
short trae' yo$ #ight want to thin, a"o$t cashing o$t "efore its too late.
/ast "$t not least' ta,e a loo, at where Ive la"ele -Higher /ows. in green for price an
-/ower /ows. in green for )s(A. *his is an exa#ple of -hien ivergence.. *he hien
ivergence i#plies that this recent owntren 2swing high of 3.2323 to 425 0i" line6 is
te#porary an that price will res$#e #oving $p.
Here is a cheat sheet on how to trae ivergences7
Diverence T!"e Price Oscillator Trade
&eg$lar Higher High /ower High SE//
&eg$lar /ower /ow Higher /ow 89%
Hien Higher /ow /ower /ow 89%
Hien /ower High Higher High SE//
*his is why I li,e a long trae. *he set$p loo,s really nice7
3. *he pair has "o$nce off its 425 0i" level an loo,s li,e its going to rise
2. *he hien ivergence provies aitional confir#ation of a possi"le #ove $p
:lease ,eep in #in that I $se ivergence as an indicator, not a signal to enter a trae; It
wo$lnt "e s#art to trae "asely solely on ivergences as too #any false signals are given.
)n the flip sie' I thin, it is <$st as angero$s trae against this inicator. If yo$re $ns$re
a"o$t which irection to trae' chill o$t on the sielines.
=hile this was a really >$ic, pri#er on ivergences' if yo$re still a little "it conf$se'
thats o,ay. I g$arantee that if yo$ re-rea what I wrote a"o$t ivergences a"ove several
ti#es while loo,ing at charts' it will co#e to yo$. If not' yo$ can always ta,e $p astrono#y
an loo, at stars instea of charts. I# ,iing. !ont worry' while we havent tal,e a"o$t
ivergences in o$r School of :ipsology' its efinitely a lesson we will event$ally a an
cover #ore in-epth. So stay t$ne.
Anot#er e$"lanation
*he inicator i $se for this was the )S(A or ?#oving average of ocilator - "asically the
histogra# on a goo #ac. *he settings are @'32'A
*he chart shows the easiest type of hien ivergence to spot an the #ost l$crative - there
are other harer to spot ones where the lows co#e in the sa#e pea, so to spea, "$t lets get
the "asics right first.
"asically this is #y efinition an how to $se it7
!eter#ine the tren with so#e ,in of #oving average or whatever else yo$ fancy - the
ones a"ove are a 3B e#a an a C0 e#a showing the tren as $p
yo$ will then see higher highs on price an higher highs on os#a - higher lows on price an
higher lows on os#a.
when yo$ see a higher low on price "$t which shows a lower low on os#a this is hien
ivergence an is $se for re-entry into the prevailing tren. the trae can "e exite in #any
ways either an os#a top or a pre-eter#ine level of s$pport. )r yo$ #ay ecie to stay in
the tren $ntil so#e ,in of reg$lar ivergence is seen.
Entry is given on the close of the first "ar that #a,es a single higher 2lower6 "ar on the
os#a. Its i#portant that yo$ wait for the "ar to close as $ntil it is the os#a "otto# is not
for#e.
*here are ways of opti#ising the entry point where yo$ can enter "efore os#a has given the
signal that its "otto#e o$t - either "y ientifying so#e ,in of s$pport Done with pivots'
#$rray #ath etc or on so#e other significant s$pport s$ch as a price channel' trenline etc.
this is the pri#e hien ivergence set$p when a"ove the os#a Dero line yo$ get 2 or #ore
higher highs in s$ccession followe "y a lower low. *here are other for#s of hien
ivergence "$t this one is the highest pro"a"ility one. If yo$ wait all ay for these an ta,e
nothing else yo$ will #a,e #oney on the# overall. Hien ivergences are seen on all
ti#efra#es
:lease let #e ,now if this was $sef$l or if it nees #ore in epth.
Attache I#ages