How to Trade CFDs Classic Bullish Divergence and Bearish Divergence

In cfd trading, classic divergence is used as a possible sign for a cfd trend reversal and is used by cfd traders when looking for an area where price could reverse and begin going in the opposite market direction. For this reason this cfd setup is used as a low risk entry method and also as an accurate way of exit out of a trade transaction.

This strategy is a low risk technique to sell near the top or buy near the bottom, this makes the risk on your trades are very small relative to the potential reward. However, this is one method with very many whipsaws & most traders do not recommend using it.

Divergence in Trading is also used to predict the optimum point at which to exit a trade. If you already have an open trade that's already profitable, a good way to identify a profit taking level would be the point where you identify this cfds trade setup.

There are two types, based on the direction of the CFD trend:

1. Classic Bullish divergence
2. Classic Bearish divergence

CFDs Classic Bullish Divergence

Classic bullish divergence set-up forms when price is forming lower lows (LL), but oscillator is making higher lows (HL). The example illustrated and shown below shows a picture of this cfds trade setup.

CFDs Classic Bullish Divergence

This examples uses MACD indicator as a CFD Trading divergence indicator.

From the above example the price made a lower low(LL) but technical indicator made a higher low(HL), this highlights there's a divergence between the price and indicator. This signal warns of a possible cfd trend reversal.

Classic bullish diverging signal warns of a possible change in cfd trend from down to up. This is because even though the price went lower the volume of sellers who pushed the price lower was less as illustrated by MACD indicator. This shows underlying weakness of the downward cfds trend.

Classic bearish CFD Trading Divergence Setup

Classic bearish divergence setup occurs when price is forming a higher high (HH), but the oscillator is lower high (LH). The image below shows an example of the setup.

CFDs Classic Bearish Divergence

This examples also uses MACD indicator

From the above example the price made a higher high(HH) but the indicator made a Lower High(LH), this highlights there's a divergence between the price and indicator. This signal warns of a possible cfd trend reversal.

Classic bearish diverging signal warns of a possible change in the cfd trend from up to down. This is because even though the price went higher the volume of buyers who pushed the price higher was less as highlighted by the MACD indicator. This indicates underlying weakness of the upward cfds trend.

In the examples above, if you as a trader had used divergence setup to trade you would have gotten good signals to enter or exit the trades at an optimal point. However, divergence signals just like other indicators, is also prone to whipsaws. That is why it is always good to confirm the diverging signals with other indicators such as the RSI, Moving Averages and Stochastic Oscillator.

A good indicator to combine classic diverging setups is the stochastic oscillator and wait for the stochastic lines to move in direction of the divergence signal so as to confirm the signal.

Another good technical indicator to combine with is the moving average technical indicator, in this indicator a trader should use the Moving Average Cross-over System

Examples of MA Crossover Method Strategy

Once the divergence signal is given, a trader will then wait for the Moving average cross over system to give a signal in the same direction, if there is a classic bullish setup, a trader will wait for the moving average system to give an upwards crossover signal, while for a bearish classic divergence signal the trader should wait for the Moving average cross over system to give a downwards bearish crossover signal.

By combining the classic divergence signals with other indicators this way, a trader will be able to avoid whipsaws when it comes to trading the classic diverging signals, because the trader will wait until the cfd market has actually reversed and is already moving towards this direction, hence the trader will not fall into the trap of picking market tops and bottoms.