How traders can use divergences to their advantage with Cleo’s automation platform

Divergence occurs when the direction of an asset’s price and the direction of a technical indicator move in opposite directions. Finding divergence between price and momentum indicators, such as the RSI and MACD, is a useful tool for identifying potential changes in the direction of an asset’s price and is therefore a cornerstone of many trading strategies. We are excited to announce that you can now use divergence to create open and close conditions for your trading strategies using cleo.finance!

Types of divergences

There are 4 main types of divergences:

Bullish divergence

Price is pushing lower lows while the technical indicator is showing higher lows. This indicates a weakening momentum from a downtrend and a reversal to the upside can be expected to follow.

Quick notes: look for troughs in a downtrend, the indicator moves up first

Hidden bullish divergence

Price makes higher lows while the oscillator makes lower lows. A hidden bullish divergence can indicate that uptrend will continue and can be found at the tail end of a price pullback (pullback down).

Quick notes: look for troughs in an uptrend, price moves up first

Bearish Divergence

Price creates higher highs while the technical indicator shows lower highs. This suggests that momentum is weakening to the upside and a reversal to the downside can be expected to follow.

Quick notes: look for peaks in an uptrend, the indicator moves down first

Hidden bearish divergence

Price makes lower highs while the oscillator makes higher highs. A hidden bearish divergence can indicate that downtrend will continue and can be found at the tail end of a price retracement (retracement up).

Quick notes: look for peaks in a downtrend, price moves down first

Regular divergences provide a reversal signal

Frequent divergences can be powerful signals that a trend reversal is likely to occur. They indicate that the trend is strong but its momentum has weakened, providing an early warning of a potential change in direction. Frequent divergences can be powerful entry triggers.

Hidden divergences signal trend continuation

On the other hand, hidden divergences are continuation signals that often occur in the middle of a trend. They indicate that the current trend is likely to continue after a pullback, and can be powerful entry triggers when confluence is present. Hidden divergences are typically used by traders to join the existing trend after a pullback.

Validity of the divergence

The typical use of divergence is with a momentum indicator – such as RSI, Awesome oscillator, or MACD. These indicators focus on current momentum, so trying to depict divergence from 100+ candles ago has no predictive value. However, changing the indicator’s period affects the lookback range for a valid divergence. Always use discretion when determining the validity of the divergence.

Available divergences in cleo.finance:

Bullish divergence bearish divergence hides bullish divergence hides bearish divergence

and you can compare those differences between two points:

Price with an oscillator indicator An oscillator indicator with another oscillator indicator Price of any asset with the price of any other asset.

Customizable parameters

All divergences have four editable parameters that traders can further adjust their divergence strategies to the best:

Lookback Series (period)

This parameter sets how far back the strategy should search for the divergence. The default value is 60 which means “Look for the deviation anywhere within the last 60 bars”

Few. distance between peaks/troughs (Turn retrospect left)

This parameter defines how many candles to the left are needed to confirm that the pivot point has been found

Tie Rods (Rotate Back View Right)

This parameter defines how many bars to the right are needed to confirm that the pivot point has been found

Time frame

Here you can define the time frame on which the divergence should take place. This time frame may differ from the execution time frame of the strategy.

The two pivot settings define each peak/trough in the divergence.

If you keep the default settings of a bullish divergence:

Flashback Range (bars): 60 Min. distance between trays (left) = 1 Fixing bars (right) = 3

This setting means that both troughs in the divergence must be the lowest points within the nearest 5 bars (lower than 1 bar to the left and three bars to the right). This must be true for both troughs that can be found within the last 60 candles (lookback range). The divergence will be confirmed 3 bars after the nearest pivot is found.

The most common uses are with RSI divergence and MACD divergence, but rest assured any other oscillator can be tested and traded live using the trading automation platform cleo.finance.

Closure

Divergences can be an important tool for traders to add to their arsenal, but they must be used in a careful and strategic manner. By keeping these things in mind, traders can potentially use divergences to their advantage to make more informed trading decisions.

It is important to approach divergences with a disciplined and strategic mindset. Using it in conjunction with other forms of technical and fundamental analysis – such as support and resistance lines, Fib retracements or Smart Money Concepts only increases the conviction of the divergence validity. Read our risk management guides on position sizing and stop loss placement.

You can start creating your optimal divergence trading strategies right away, along with over 55 technical indicators, price action and candlestick data points! We are constantly improving the cleo.finance platform. If you have a request for an indicator or data point, let us know.

Register or login now with cleo.finance and reach your full trading potential with the most innovative tools in the markets!