Tuesday, March 25, 2008

Divergence

Divergence defined “When the price of an asset and an indicator, index or other related asset move in opposite directions.” Classical Divergences are of two types Bullish and Bearish (positive and negative).

Bullish Divergence occurs when the price of a security makes a new low while the indicator starts to climb upward.

Bearish Divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead closes lower than the previous high. There is yet another type of Divergence which Martin.J. Pring refers to as Reverse Divergence also popularly known as Hidden Divergence (HD).

Technically HD is opposite of Classical Divergence. Hidden Divergence, seek higher price lows accompanied by lower indicator values during up moves and lower price highs accompanied by higher indicator values during down moves.

Yesterday I found a similar setup in ONGC. The chart above is a 25 min chart of ONGC futures the price makes a double bottom (not exactly a higher low as one would ideally want in such set ups) and all the three indicators below trace lower lows aka. Bullish HD. I entered ONGC at 1000.50 yesterday and carried it for today.

The entry was good as can be seen from today’s chart given below .I booked my profit at 1035.Sadly I missed the second half of the move. My trailing stop got hit. No complaints but yes could have been better!!!!

No comments:

Post a Comment