The Stochastic Divergence Indicator identifies the irregular reactions between the price and the Stochastics curve and transforms them to speculate the following market trend direction.
When it comes to divergence trading, traders usually name RSI and MACD as their favorite tool for determining the price divergences. However, the Stochastics indicator also offers effective divergence signals, especially those seeking swing trading opportunities in shorter timeframes.
The Stochastic Divergence Indicator points trend reversals by plotting trendlines in both price chart and indicator window. It enables you identify the opposite price-actions compared to the stochastics movements in naked eyes.
However, as a beginner, traders may find it hard to spot the peculiar price movements manually. Thankfully, the indicator generates arrow signals confirming the bullish/bearish divergences so that traders can speculate the price reversals more conveniently.
A divergence occurs when the price moves oppositely to the Stochastics curve. For instance, the price makes a lower low, and the Stochastics plots a higher low indicates a bullish divergence. A blue arrow is pointing upwards in the indicator window signals for a bullish divergence.
While anticipating divergence trades, we also need to consider the Stochastics value for filtering the trade signals and minimizing market noise. For example, Stochastics at 80 means the market is oversold. Therefore, considering a bearish divergence to go short in an oversold market offers a greater success probability.
Also read: Exness Review – Is it The Best Forex Broker?
- A blue arrow appears in the indicator window pointing upwards to signal a bullish divergence
- The Stochastics value remains near 20, indicating an oversold market condition
- Exit long when the price gets restricted by a trendline or horizontal resistance
- The indicator plots a red arrow signaling a bearish divergence
- The stochastics value roams around 80 suggesting an overbought market
- Exit short after the price rejects to move below a trendline or horizontal support