How To Trade a Divergence Properly

Summary

In this video, Artie explains the concept of divergence in trading, highlighting its potential as an indicator for market reversals. He demonstrates how to identify divergences using the RSI indicator while focusing on specific price movements within defined trend channels. Artie shares his 'secret sauce' strategy, emphasizing the importance of waiting for divergences to occur within the 70-30 RSI range before entering trades. By trailing profits and managing stop losses effectively, traders can enhance their risk-to-reward ratios, maximizing profitability in day trading. This insightful guide aims to simplify the trading process for viewers.

Takeaways

• 📈 Divergence can indicate a market reversal, but it's not synonymous with it.
• 🔍 Use the Relative Strength Index (RSI) to identify divergences in price movements.
• 📊 Trend lines help visualize market behavior and determine support and resistance levels.
• ⚡ Divergences are more significant when they occur outside the standard RSI levels (70 for overbought, 30 for oversold).
• 🛠️ Enter trades when the RSI returns to the normal range after signaling overbought or oversold conditions.
• 📉 Adjust stop losses to break even as profits are taken to minimize risk.
• 🔄 Wait for clear divergences to form before making trading decisions.
• 📏 Utilize a one-to-two risk-to-reward ratio for safer trade management.
• 🧭 Trail profits by moving stop losses to previous lows and adjusting targets as price moves.
• 💡 Combining trend lines with divergences provides a robust trading strategy.

Q & A

What is the difference between divergence and reversal in trading?

Divergence can indicate a potential reversal, but they are not the same. Divergence shows a disagreement between price movement and an indicator, suggesting that a reversal might occur.

What tool does Artie use to identify divergences?

Artie uses the Relative Strength Index (RSI) to identify divergences in price movement.

How does Artie suggest confirming a divergence before entering a trade?

Artie recommends looking for a divergence that occurs within the RSI's standard overbought (70) and oversold (30) levels, waiting for price to move back into this range before entering a trade.

What is the significance of the RSI levels 70 and 30?

These levels indicate overbought (70) and oversold (30) conditions in the market. Artie advises that trades should ideally be initiated when the price moves back into this range after a divergence.

What strategy does Artie recommend for managing trades once they are open?

Artie suggests taking partial profits at previous lows and moving the stop loss to break even as the trade progresses to secure profits and reduce risk.

How does Artie recommend determining the stop loss for trades?

He suggests setting a stop loss of about 50 points for indices, which helps manage risk while considering potential slippage and spreads.

What example does Artie provide to illustrate the use of trend lines?

Artie discusses the NASDAQ 100 and illustrates how to identify uptrends and downtrends using trend lines to visualize market structure.

Why does Artie suggest measuring the volume of price wicks differently?

He suggests measuring the body of the candle rather than the extreme of the wick, as the body reflects more significant trading volume.

What is Artie’s approach to setting risk-reward ratios?

He recommends initially setting a conservative risk-reward ratio, such as 1:2, and then trailing profits as the trade moves in a favorable direction.

How does Artie describe the importance of patience in trading?

He emphasizes that successful trading, especially when identifying divergences and trend lines, requires patience to wait for the right setups to form.