The momentum divergence indicator tells the bullish and bearish divergences. The indicator uses the momentum oscillator to find these divergences.
This guide will explain the momentum divergence indicator and how you can trade with it.
What is the Momentum Divergence indicator?
The momentum divergence indicator talks about the market’s bullish and bearish divergences. The indicator works like any other oscillator, which you can use to find divergences like the RSI. However, the RSI doesn’t automatically draw lines to signify a divergence.
The momentum divergence indicator removes the hassle of navigating the divergences manually. We have a divergence whenever the price and the indicator move in the opposite direction.
How to trade the Momentum Divergence indicator?
You must know what divergences are to trade with the momentum divergence indicator.
There are two types of divergences, bullish and bearish.
Bullish divergences occur when the price is lower, but the momentum divergence indicator makes a higher low. This suggests a trend reversal.
Conversely, when the price makes a higher low, but the indicator makes a lower high, we can expect a trend reversal in the bearish divergence.
The momentum divergence indicator mentions the divergences by plotting green and red arrows. The green arrow suggests a bullish divergence, while the red arrow signifies a bearish divergence. Whenever the arrows pop up, we can enter our trade.
In the chart above, the momentum divergence indicator plotted in green arrows suggests a bullish divergence.
Although the momentum divergence indicator talks about the trend reversal, it doesn’t mean the trend will reverse. The indicator can plot several green and red arrows to signify a trend continuation rather than a reversal.
So, you have to use other forms of technical analysis in combination with the momentum divergence indicator. One key example is the support and resistance levels combined with the momentum divergence indicator.
For instance, if the price reaches a support level, and the momentum divergence indicator shows a bullish divergence, we can enter the trade more confidently, knowing the price might reverse.
The good thing about the momentum divergence is it works on all timeframes. However, it’s best to apply it on longer timeframes to remove some of the noise which can occur on the lower chart timeframes.
Buy Signal
- The indicator must plot green arrows and make a lower high.
- You should Wait for the price action to continue moving upwards and enter the trade.
- You could use any other confluence, like the support/resistance levels, to confirm the trend reversal.
- You should set take-profit at the previous high from the entry point.
- You should place a stop-loss at the recent swing low.
Sell Signal
- The indicator must plot red arrows and make a lower high.
- You should Wait for the price action to continue moving upwards and enter the trade.
- You could use any other confluence, like the support/resistance levels, to confirm the trend reversal.
- You could set take-profit at the previous high from the entry point.
- You could place a stop-loss at the recent swing low.
Conclusion
The momentum divergence indicator shows the bullish and bearish divergences by plotting green and red arrows. The indicator can plot multiple arrows, so combining it with other technical tools like support/resistance is best.
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