Monday, 4 November 2019

This is an Important Secret Why Indicators Move in Different Directions With Prices

The name of trading, before Open Position, we will definitely be fiddling with various indicators on the chart. The goal is simple, so to be able to signal, there are clues in the direction where the price will move. Generally, these indicators almost always move in the direction of prices. It means that if the price decreases, the direction of the indicator will also be sloped, if one goes up, the other will also follow. However, what happens if the indicator moves in the opposite direction with price movements?

Divergence, the "Effectual" Filter to Filter Price Shocks Indicators are generally designed by their creators to represent price movements. So naturally, the indicator will move in the direction of price movements. That's if the market conditions are normal. Now, if you look more sharply, it turns out that the indicator does not always move in the direction of price movements. For example when prices skyrocket, the indicator even just moves horizontally or even slowly decreases. Loh, why is that possible? What caused it? Well, please note that indicators, especially Leading Indicators such as RSI, MACD and Stochastic, are able to project alias "predict" the fate of, uh, price movements. Described in more detail, Leading Indicators can plot the overbought and oversold points. Overbought points can also be used as a benchmark Resistance. Meanwhile, Oversold Level can be considered as a Support level. So when prices fluctuate due to trader sentiment, leading Indicators are able to "filter" at which level the true nature of prices should be. This is a technical reason why the indicator (Leading) can move in the opposite direction or Divergence with the latest price movements. Then what is the importance of us knowing this Divergence phenomenon? Good question, because the Divergence is closely related to eccentric trading signals. In short, you will get a Buy signal when the price falls or a Sell signal when the price soars, but it can be profitable. Curious? Read on for the details of the divergence finding technique below.

Divergence, Contrarian Trader Weapons Against Market Sentiment As we know, the sentiment of the majority of traders is generally market opinion regarding the latest price movements. It should be noted, not necessarily Bullish or Bearish sentiment will move prices according to the expectations of the majority trader. For example like in the XAU / USD (Gold) chart below:

From circle no. # 1, when the current price has broken out of resistance, the sentiment of the majority of traders is bull. So, traders compete to place Buy positions. When the majority trader insists on maintaining a Long position, the Contrarian trader discovers that there is a divergence. On the MACD indicator, the histogram shows the decline from the two highest peaks. Likewise with the RSI indicator. In conclusion, the majority of Bullish sentiments have run out of steam to push prices even higher. Once the Divergence signal is confirmed, Contrarian traders place Short (Sell) positions to counter the majority Bullish sentiment. The result, contrarian traders managed to get a big profit from Short positions in the range of 1180 levels. What if the majority sentiment is Bearish? There is still a second example. This time, the price continues to decline until it breaks the Support. The market reacts with Bearish sentiment, so many traders press the Sell button. Dare to be different, Contrarian traders actually place Buy positions. Because once again, he gets the Divergence signal. As a result, even though Sideway had been able to last for days, finally prices climbed, contrary to the sentiment of the majority Bearish traders. Great, right? With Divergence trading signals, Contrarian traders can filter noise from the sentiment of majority traders. Although the latest prices were driven by the majority of the market. But anyway, in the end the price will return to the true value indicated by the Divergence on the indicator.

Also Raed : Trading Reference Using Price Action

Related Post

Post Top Ad

Your Ad Spot