Test medium-term divergence with a trendline break and a trailing stop

Read the mismatch before the entry

This archive article covers a medium-term decision stack. Divergence is price and an oscillator making opposite higher or lower swings, used as a reversal or continuation signal rather than a standalone entry.

A trendline is a line drawn across successive highs or lows that turns a chart condition into a confirmable break-or-hold rule. A trailing stop ratchets with favorable price and bounds loss or exposure from before entry through the life of the position.

Classify convergence and divergence

When price and an oscillator make higher or equal bottoms, the pair is treated as convergent. The more probable path is continuation of the existing uptrend until another indication appears.

An oscillator higher bottom against a price lower bottom is treated as a divergence typically found at the end of a downtrend and used as an uptrend-reversal hypothesis.

An oscillator lower top against a price higher top is treated as a divergence typically found at the end of an uptrend and used as a downtrend-reversal hypothesis.

Equal oscillator bottoms or tops against price higher bottoms or lower tops are also treated as divergent. Matching oscillator swings still count as a mismatch with price structure.

A 14-bar relative strength index can be overlaid on price to compare swing highs and lows and classify medium-term reversal or continuation divergences.

Confirm with a trendline

Convergences, trendlines, moving averages, chart patterns, and stops can be combined into one decision stack rather than trading a divergence signal in isolation.

The trendline in that stack is the line across successive highs or lows that turns the chart condition into a confirmable break-or-hold rule.

Keep a trailing stop on the book

A percentage trailing stop can be coded to stay put when the close is unchanged. While price remains on the same side of the trail, the stop tightens to the more protective of the prior trail or a percent band around the close. When price crosses the trail, the stop resets to a new percent band.

That trailing stop bounds loss or exposure from before entry through the life of the position. An initial stop plus a trailing stop remain required.

Stack the rules when divergence is present or absent

A short can be opened with an initial stop at the previous top, then closed for profit when a down trendline breaks and a confirming oscillator turns up from below a lower deviation band.

If divergences are absent, convergent moves are still handled with trendlines, support and resistance, and a confirming oscillator. An initial stop plus a trailing stop remain required.