Friday, 24 June 2011

Bullish divergence trading - guidance from La papillion

This post summarise what I learn from LP, owner of Bullythebear blog. I will follow on with 5 charts after this post for applying and checking what I had understand so far is correct or not. 

Bullish divergence means that the price has a high chance of going up.
The divergence refer to the fact that price and whatever indicator you are seeing, are moving in opposite direction.
Example, if use vol, then a bullish (vol) divergence means that the price showing a lower low, but vol shows a higher low.

If you see a bullish Divergence on weekly and a bullish Divergence on daily, what will you do?

If you see a bearish Divergence on weekly and bearish D on daily, what will you do?

If you see bullish Divergence weekly bearish Divergence daily?
There's no correct ans. First of all, the general guide is to either stay sideline. You can either short it but run fast (since weekly is bullish, so you're going against longer timeframe) but you do not buy

If you see bearish Divergence weekly bullish Divergence daily?
hold sideline. can long it but must run fast.

Once weekly and daily sentiments are matched, go in the direction of that sentiment


Psychologically, the price goes down at A but rises up to break the back of the bear at B, then goes down one more round at C.

But you'll notice that the selling pressure at C is weaker than at A, by looking at the macd histogram the selling has eased off when it reaches C...that's where it's the best time to counter trend and bet on a reversal. Buy once it goes above the price of A. Could add in support and resistances too.

Must have ABC in price and abc in macd histogram. point B indicate the breaking of the back of the bear.

Courtesy from
"The concept of triple screen trading is this: Do not trade in the current time frame unless the upper time frame allows you to trade."

Analogy of bullish divergence on two time frame.
The current time frame is like order from your direct boss whereas the upper time frame is like order from your biggest boss. Big boss determine the stronger trend and rule but sometimes direct boss try to disobey the big boss but it may or may not be successful. As you are only a small fry, you have no choice but to listen to both bosses, but the overall power still in the hand of the biggest boss.

If biggest boss pass down a rule, direct boss try to disobey and cause big anger from biggest boss. As the biggest boss is biggest, you should not disobey. Biggest boss pass down rule 2, direct boss disobey again but manage to succeed one time. Biggest boss pass down rule 3, this time the direct boss try to disobey again. Although there is anger from the biggest boss again, but the anger was much milder as compare to the first time. This shows that there is a probability that the direct boss got chance to break out of the rule of the biggest boss. Thisis the best chance to bet against the biggest boss.

Updated below: Summary
Bullish divergence:
  • Price form lower low (A->C), MCAD histogram form higher low (a->c)
  • Must have ABC in price chart and abc in histogram chart
  • a and c below center line, b above center line
above only valid and can go long ONLY if
higher time frame show bullish divergence(weekly), current time frame(daily) show bullish divergence


la papillion said...

Hi OT,

Your example is quite apt :) I wonder what is the lower timeframe in your analogy if we can extend it to 3 timeframe instead of 2 :)

There's one impt thing you didn't include: for bullish divergence, the a and c must be below the centerline, but b is above the centerline.

I suggest you write down the rules in point form - makes it easier to check whether a certain chart fulfills the stringent and many conditions for a valid divergence. Once you've done it many times (you will, if I had it my way), you'll remember it very well through the practice sessions that you don't have to look through the rules again.

OT83 said...

Hi LP,

You are right. Point form is good but practice is even better. Updated the divergence in point form. Slowly I will come out with the 5 charts.

Lower time frame perhaps might be myself. I am powerless against both bosses but I try to disobey them but is it very hard as I am the lowest powerless lifeform. Got chance to oppose successfully but must do it fast if both boss are making rule different from mine.

Is this suitable for the lower time frame?


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