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Over/Under Divergence Setup
Thanks to Birdman
for the explanation. Visit his site for more trading tips and
charts.
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Over/Under Divergence by
Birdman
Over/Under Divergence is a very good way to find
tops and bottoms in the market. Below you will see how to find these divergences
on all charts, all timeframes. With dedicated screen-time, it's possible to
train the eye to catch this setup over and over again. The next step, then,
becomes learning to apply it at the right times. Only experience can teach this,
but here is a great place to start.
Over/Under
Divergence - an attempt to predict a market TOP
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1.
The Indicators -
A.
The only indicators used on this setup will be the 7, 3, 3 stochastic
and the 21, 10, 4 stochastic. The respective settings for these can be
found on the Chart
Template section.
2.
The Pattern -
A.
The market tests the previous swing high. This can turn into a
2b setup as well.
B.
The 7,3,3 stochastic must be making a LOWER high than on the previous
market swing.
C.
The 7,3,3 stochastic must be BELOW the 21,10,4 stochastic on the
current market swing but ABOVE it on the previous market swing.
D.
Once the test or 2b poke bar occurs, the next bar must take out the
LOW of the poke bar. This will cause the 7,3,3 stochastic to
fall with it.
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| This is where the
name "Over/Under" comes from. Think of it as nothing more
than the stochastic being OVER the 21,10,4 and then UNDER it, when
comparing the two swings. This gives a way to easily quantify what may
be market that is losing it's strength. Once the market takes out the
low of the test bar (or 2b), the setup is complete and may be a place
to exit any long positions, and in many situations it can be a place
to enter short. Usually, the 21,10,4 will also be pulled down by
price. |
Under/Over
Divergence - an attempt to predict a market BOTTOM
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1.
The Indicators -
A.
The only indicators used on this setup will be the 7, 3, 3 stochastic
and the 21, 10, 4 stochastic. The respective settings for these can be
found on the Chart
Template section.
2.
The Pattern -
A. The
market tests the previous swing low. This can turn into a 2b setup
as well.
B. The
7,3,3 stochastic must be making a HIGHER low than on the previous market
swing.
C. The
7,3,3 stochastic must be ABOVE the 21,10,4 stochastic on the current
market swing but BELOW it on the previous market swing.
D. Once
the test or 2b poke bar occurs, the next bar must take out the HIGH of
the poke bar. This will cause the 7,3,3 stochastic to rise with
it.
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| Like the Over/Under
Divergence setup, the Under/Over is doing nothing more than trying to
find a weak market that may be running out of juice. It will take
screen-time to learn when to apply these setups. Here are a couple of
hints:
1. If the setup occurs in tandem with another
setup you have trained your eye to see, the likelihood of success is
higher.
2. Key points on Trendlines, Moving Averages,
and Bollinger Bands may offer a particular spot to look for the setup.
Primarily, if price is trading at one of these noticeable points, it may
be beneficial to look at a smaller time frame for the setup to appear,
giving you a better entry.
3. In a strong trend, beware. What may appear
as an Over/Under setup could be nothing more than a pullback on the
higher time frames, which often doesn't give enough room to trade. A
couple warnings may be a very strong stochastic that has been above 80
or below 20 for a long time. This signals a trending market. A large
spread in MA's may often warn of a strong trend as well. Like anything
else in trading, there are many other ways to avoid the cautious areas.
4. Naturally, if the higher timeframes support
the direction of the divergence, it has a higher chance of success and
also often has more room to run. It would probably be smart in the
beginning to take only these divergence trades with the trend of the
higher timeframe.
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Traded properly, this setup can be very
profitable with high rates of consistency. At the same time, it often provides
an entry with extremely low risk compared to the potential reward. Learn to
train your eye for the appropriate places to apply the setup, and you will be
greatly awarded!
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miracles,
they are everywhere.............. 