In the world of crypto trading, divergence is one of the most powerful signals indicating a potential trend reversal. Many novice and even experienced traders are accustomed to looking for it on the RSI (Relative Strength Index), but what if we told you that relying on just one indicator is a risky strategy? In this article, we'll show you how to use two other popular tools for finding divergences—MACD and Stochastic—and how their combination can significantly increase the accuracy of your trading signals.
Following up on our previous article on divergences, which are powerful leading indicators, experienced traders know that the best way to confirm a signal is to use multiple tools. It's like cross-referencing information from several independent sources. If a divergence appears not only on RSI but also on other indicators, the probability of a successful trade increases manifold.
MACD Divergence: A Step-by-Step Guide
MACD (Moving Average Convergence Divergence) is a trend-following indicator that shows the relationship between two moving averages of a price. It consists of the MACD line, a signal line, and a histogram.
Bullish MACD Divergence
The asset's price forms a new low (or a double bottom), but the MACD forms a higher low. This means selling pressure is weakening, and an upward move may begin soon. This is a strong buy signal.
Bearish MACD Divergence
The asset's price forms a new high (or a double top), but the MACD forms a lower high. This means buying pressure is weakening, and a downward move may begin soon. This is a sell signal.
Stochastic Divergence: A Step-by-Step Guide
The Stochastic Oscillator is a momentum oscillator that shows the closing price's location relative to its trading range over a given period. It is highly sensitive to changes in momentum, which makes it an excellent tool for finding divergences.
Bullish Stochastic Divergence
The price forms a lower low, while the Stochastic forms a higher low. This means selling momentum is running out. This is a precursor to an imminent reversal and a potential upward move.
Bearish Stochastic Divergence
The price forms a higher high, while the Stochastic forms a lower high. This means buying momentum is weakening. This signals a possible reversal and the start of a downtrend.
Combining Signals: How to Confirm Divergences
Using several indicators to confirm a divergence is key to success. For example, if you see a bullish divergence on RSI, don't rush to open a position. Look at the MACD and Stochastic. If they also show a bullish divergence, your signal is confirmed, and the probability of a positive outcome is significantly higher.
Conclusion: Automation and Efficiency
Understanding how to find divergences using different indicators makes you a more professional and successful trader. But to stay ahead, it's essential to automate this process. Divergence Hunter is the perfect tool for those who want to receive accurate signals confirmed by multiple indicators, right in their Telegram.
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Telegram channel: CryptoPattern Official EN.
