thE hAnDbook of tEchnicAL AnALySiSincluded are the price confirmation levels where the breakout of a prior support or
resistance level confirms bullish or bearish divergence setup and provides a price
trigger for participatory action.
Though divergent setups are normally traded at the breakout of some price
barrier, more experienced traders sometimes also employ standard divergence to
help them initiate countertrend entries like buying on the dips or selling into the
rallies. The use of various price barriers and indicator overlays, which include
previous supports and resistances, trendlines, price channels, popular moving
averages, and various volatility bands, may be used to help identify potential
supportive and resistive confluences where buy and sell limit entry orders may
be placed for a countertrend entry, with stoplosses positioned slightly beyond
the confluence zones. Time projections of cyclic highs and lows, apex reaction
timelines, and Gann’s Squaring of Time technique may also be used to pinpoint
potential reversals at the projected price barriers. Countertrend trades are far
more insidious and difficult to initiate, as the entries must be made during the
nascent and less obvious stages of divergence where the art of anticipating po-
tential entries is more difficult to master. Breakouts from divergent setups are
significantly easier to identify and trade. Another way to take advantage of buy-
ing dips and selling rallies when divergence is identified at the current larger
trend is to initiate breakout trades at a lower wave degree, where entries based
on price confirmation are more easily achieved. We shall see some examples of
this shortly.
Logically speaking, comparing peaks in a rising market and troughs in a fall-
ing market makes sense as market participants are psychologically more inclined
to focus on new highs in a rising market and conversely on new lows in a falling
market in order to make important trading and investment decisions, and it is for
Figure 9.32 Standard Bullish and Bearish Divergence.
Source: MetaTrader 4