Brandon Wendell, CMT
Brandon Wendell
Online Trading Academy graduates know that their trading decisions should be based on price action and volume. Technical indicators are very popular in the trading community but need to be used only as an odds enhancers. It is important to remember that an odds enhancer is used to increase the probability of a trade working out, not to signal the entrance to a trade itself. You should still execute trades based on price analysis and supply and demand levels. Whenever I start to discuss technical indicators, everyone always asks me what my favorite one is. I never get bored from watching the disappointment on their faces when I answer, “Price!”
The truth is, all indicators are built on past price and relationships to that price with volume included on some. If you understand the mechanics of the indicator, then you know how it is likely to read Price movement and when the indicator will give signals by simply reading price on a chart. When you can do this, then you will be ahead of those who are relying on an indicator to render a buy or sell signal prior to acting. Indicators can be helpful when used properly. Since the buy or sell signals usually appear late, we must observe the behavior of the indicator and take our signals from changes in that behavior.
Enter divergence. Divergence is when the indicator is not exhibiting the same characteristics as the price of the security. When prices rise, you should be seeing higher highs and higher lows for the uptrend in price. You should also be seeing higher highs being made in the indicators. The opposite is true when in a downtrend, lower lows in price and the indicator. There are two types of divergence, positive and negative. Positive divergence typically signals the pause or end of a downtrend. In positive divergence, the price of the security makes lower lows and lower highs, a downtrend. However, the indicator makes the same lows or possibly higher lows.
The divergence of the indicator shows that even though prices are continuing in the trend, they are doing so with less momentum and are unlikely to continue without a pause, correction or even a reversal. This is shown in the following chart with positive divergence in the Stochastics.
Negative divergence typically signals the end, pause or correction of an uptrend. It occurs when prices are making higher highs and higher lows (an uptrend), but the indicator makes similar or lower highs. This lack of momentum being demonstrated by price and reflected in the indicator is a signal of weakness of the trend. Be watchful for reversal signals in this environment.
A trader can use technical indicators, but you want to be sure to use them properly. Relying on them to signal your entry or exit to trades could lead to disaster. Looking for divergence to confirm your trade that was based on price action is the best way. Learn how to read price correctly by joining one of our courses today.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD flirts with three-day lows near 1.1570
EUR/USD resumes its march south on Thursday, revisting the 1.1570 region, or three-day lows, ahead of the opening bell in Asia. The intense sell-off in the pair comes in response to the solid performance of the US Dollar amid the still unresolved crisis in the Middle East. Moving forward, investors are expected to shift their focus to the release of the US NFP on Friday.
GBP/USD stays offered near 1.3340
GBP/USD fades Wednesday’s uptick and trades with decent losses in the 1.3340 zone in the latter part of Thursday’s session. Cable’s weakness, alongside the rest of the risk complex, follows the strong performance of the Greenback amid intense geopolitical jitters.
Japanese Yen turns upside down against US Dollar as dovish Fed bets recede
The Japanese Yen gives back its early gains and turns negative against the US Dollar during the European trading session on Thursday. The USD/JPY pair rises to near 157.35 as the US Dollar resumes its upside journey after a corrective move. As of writing, the US Dollar Index trades 0.4% higher to near 99.15.
Editors’ Picks
AUD/USD looks weak, breaches below 0.7000
AUD/USD quickly forgets about Wednesday’s advance and resumes the weekly correction, breaching below the 0.7000 mark to hit fresh two-day troughs and opening the door to a potential challenge of monthly lows in the 0.6950-0.6940 band. In the meantime, the increasing flight-to-safety environment is expected to keep the Aussie and its risk-linked peers under intense pressure for now.
EUR/USD flirts with three-day lows near 1.1570
EUR/USD resumes its march south on Thursday, revisting the 1.1570 region, or three-day lows, ahead of the opening bell in Asia. The intense sell-off in the pair comes in response to the solid performance of the US Dollar amid the still unresolved crisis in the Middle East. Moving forward, investors are expected to shift their focus to the release of the US NFP on Friday.
Gold: further weakness could challenge $5,000
Gold comes under fresh selling pressure on Thursday, slipping back below the $5,100 mark per troy ounce. Persistent strength in the US Dollar (USD) is preventing the yellow metal from building a meaningful recovery, even as markets remain risk-averse amid the deepening conflict in the Middle East.
XRP rises as crypto market steadies despite Middle East war
Ripple (XRP) continues to demonstrate notable resilience as the cryptocurrency market navigates the persistent war in the Middle East after the United States (US) and Israel attacked Iran on Saturday.
Two PMIs, two Chinas Premium
China’s economic data are often treated with a degree of caution by global investors. The challenge is not necessarily that the numbers are incorrect, but that they can describe very different parts of a vast and complex economy. Nowhere is that more evident than in China’s PMIs.
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