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Use this handy indicator to trade the stock market

by , 13 October 2015

If you're looking for a technical indicator that works well whether you're trading the stock market or other financial markets, you should consider using momentum divergence.

So how can you use momentum divergence in your trading?

Read on to find out…

What is momentum divergence?

Momentum divergence is a good indicator to use when the stock market has been in a sustained trend.

When you find it, it often indicates that a trend is coming to an end and a new one is about to start.

The theory behind momentum divergence is that when a price makes a new high after a sustained trend, it shows that buying pressure is still dominating. Traders taking profit or some selling can turn the trend momentarily.

If the new high results in more buying, the market may hit a new high as new short traders exit their trades. But if the buying isn’t strong enough, the market can reverse its trend as selling pressure dominates.

When momentum doesn’t confirm the price move, you have a chance to trade.

Have a look at the chart below. The red lines highlight momentum divergence, John Burford in Money Morning UK explains…

Chart showing momentum divergence

As you can see above, the divergence of momentum led to a sharp rally. A great profit opportunity for savvy traders.

Using momentum divergence

Momentum divergence is a good indicator to use in a variety of markets including equity, commodities and forex.

The larger the divergence, the sharper the recovery in price tends to be.

By looking out for momentum divergence from the price, you can find great entry points into trades. Play around with charts of assets you trade to see how the price reacts when momentum diverges.

So there you have it. A handy indicator to trade the stock market.

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Use this handy indicator to trade the stock market
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