Trading Divergences using Stochastic Oscillator

Often Stochastic are supposed to be lagging. But, what if we can find a way to get the leading signals using indicators?

Well, the answer is divergence using stochastic oscillator.

If price is making higher highs, the oscillator should also be making higher highs. If price is making lower lows, the oscillator should also be making lower lows.

If they are NOT, that means price and the oscillator are diverging from each other. And that’s why it’s called “divergence.”

There are 2 types.
1. Regular
2. Hidden

Regular Divergence
1.1. Bullish Divergence



If price is making lower lows (LL), but the oscillator is making higher lows (HL), this is considered to be regular bullish divergence.

Even, if price makes Higher lows and the stochastic also higher lows then also you can buy. [This is not divergence and this pattern will appear more often than regular bullish divergence. Let's call this convergence.]

Start going through the charts.

I use the default setting for stochastics oscillators i.e. 14. I have traded this on 5 min TF, 30 min TF and daily TF.

I am starting this thread to see if we can improve the strategy.

Note : The oscillator can remain in oversold or overbought as long as it want. We shouldn't buy and short when the stochastic goes in one of the region. But, we can book some profit if we are already in the trade.

vagar11,

A very detailed thread on this topic by Smart_trade already exits.( How to trade with an oscillator? )

Do u intend to discuss anything different & if so i eagerly look forward to it.

Go ahead.

I will be discussing only the trades using divergences and convergence from my perspective. I went through ST sir thread a while back and it was mainly around 5 bars concept and I couldn't go through the whole thread as it was very long(may be there is a discussion of divergence).

I am not trying to duplicate or copy paste anyone's methods here. If the moderators think it so, they can be consider it as my trading journal and move this to the proper section.

I think trading with divergence is easy for beginners, it gives us a good entry point and I found them to have a good success rate.

Few things to observe for convergence
1. In above chart stochastics is making higher low and the price is also making higher low.
2. The white line started making a up move (if the stochastics level is still near the oversold zone, we can get a good move).
Entry
We will initiate the trade as soon as we the condition mentioned in point 2. The entry point as per the image is B.

Target -
A. We can book the profit at the nearest Resistance if you see the stochastics line getting overlapped otherwise let the profit run.
B. We can book when the stochastics goes into overbought region.
C. We can book when the stochastics line crosses in overbought region.

It's left upto you when do you want to book the profit.
Note : If the gap is clear between the stochastics line when it crosses the overbought region, I would wait and book the profit when they cross.

Stoploss
The stoploss would be our below the point C.

What is convergence and Is there any such concept in TA ?
And this is not Hidden divergence....HD rules are different...

I haven't talked about hidden divergence yet. I have not seen any term name "convergence" in TA. I have derived it myself as both prices and oscillators are matching and the name had to be similar with divergence.

I mentioned this in my first post

Generally indicator moves in line with price.
If there is any deviation in above its called divergence.

So there are only 2 types ..1) normal relation between price and indicator and
2) divergence ..when there is deviation in normal relation.

You are renaming the first one (normal relation ) as convergence. That's completely wrong.
When indicator moves similar to price that's normal. That cant be given a new name like convergence.

When there a divergence..prices/indicator may correct ( converge ) and come back to normal relation. That correction phase can be called as convergence.

Agree.
I need to give that normal relation a name so that I can refer it further in the thread. We don't need to follow what everyone has followed in the past.

I don't want to just follow what is already there in the books or everyone is following.We can derive our own patterns that works for us. This normal relation is working for me.

I thought convergence would be a good choice. Let's call it Harmony then.

Yes, price line and indicator moves in harmony.
Yet sometimes they break that harmony and diverge from that parallel pattern. That is called Divergence.

Period in which that diverged lines converge back to parallel pattern in called convergence. But you mistook the Default relation between price and indicator line to be convergence.