I'll be scouring the charts for "actionable masterpieces". These will be signficant chart patterns or set-ups that I feel are not only tradeable, but also have a high probability of making big profits with little risk. Whenever I spot an "actionable masterpiece", I will post an annotated chart (my chart art) along with an explanation. My goal is to help you learn how to spot these low ocurring but highly profitable "actionable masterpieces" yourself.
Regular Divergence
Regular divergence is one of the best-known types of nonconfirmation. A divergence is a separation between price and indicator that warns of a possible short-to-intermediate term change of trend.
Bullish Divergence
A bullish divergence arises during a down move when price makes either a lower low or a double bottom but the indicator makes a higher low or a double bottom.
On this 1-hour EUR/USD chart, I have marked where price makes lower lows with vertical lines so you can see where price is relative to the indicators. Can you see how the market made lower lows but RSI had higher highs, Stochastics had higher highs, as well as the MACD histogram? That’s bullish divergence baby!
So what the heck happens when there’s bullish divergence you ask? Well if you look at the chart, it’s pretty self-explanatory. The market stops its downtrend and goes back up!
Bearish Divergence
A bearish divergence occurs during an up move when price makes either a higher high or a double top and the indicator makes a lower high or a double top.
Let’s take a look at this 1-hour EUR/USD chart. As you can, the price made higher highs. But if you look at the indicators below, RSI made lower highs, Stochastics created a double top, and MACD histogram also made lower highs. This is how a bearish divergence looks like in action.
Let’s look at what happens. The rising uptrend stops and the price falls about 80 pips.
