Two Roads Diverged: Trading Divergences Elder.com e-book Series Dr. Alexander Elder Copyright 2012 by Dr. Alexander Elder ISBN: 978-1-4524-7698-8 Published by elder.com Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the difference. Robert Frost (1874 – 1963) DEAR READER: electronic publishing is still in its infancy. If the fonts do not to look right on your screen, try printing out this e-book – it will look fine on paper. Also, if you have any suggestions on improving or updating this book, please write to the author at
[email protected] LEGAL: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the prior written permission of the copyright owner. Disclaimer of warranty: while the author has used his best efforts in preparing this book, he makes no representations or warranties in respect to the accuracy or completeness of the contents. The advice and strategies contained herein may not be appropriate for your situation. You should consult with a professional where appropriate. The author shall not be responsible for any loss. Last revised: January 2012 Books by Dr. Alexander Elder Trading for a Living Study Guide for Trading for a Living Rubles to Dollars Come into My Trading Room Study Guide for Come into My Trading Room Straying from the Flock Entries & Exits: Visits to 16 Trading Rooms Study Guide for Entries & Exits The New Sell & Sell Short (with Study Guide) To Trade or Not to Trade: A Beginner’s Guide (e-book) Table of Contents How to Work with This Book Free Updates & the Honor Code Review of Tools A Bullish Divergence: A Basic Definition What is NOT a Bullish Divergence A Bearish Divergence: A Basic Definition What is NOT a Bearish Divergence Reader Exercises Entries, Stops, and Profit Targets Additional Points on Divergences Divergences in Other Indicators Divergences in Multiple Timeframes Scanning for Divergences The Next Step: MACD Semi-Automatic Conclusion Thanks Sources About the Author To find the truth, look below the surface! What you see on the surface is often deceptive – in trading, as well as in life. A trend may appear strong, while below the surface it may be weak and ready to reverse. We have indicators that measure the internal power of a trend. At times they confirm an uptrend and tell you it’s OK to hold or add to your positions. At other times they signal that the trend is suspect: it is better to exit, take profits, and even consider switching from long to short or vice versa. A divergence is a disagreement between the patterns of indicators and prices. We find bullish divergences near market bottoms and bearish divergences near market tops. Many traders use these words very loosely – I want to make these important terms very clear. The purpose of this book is to help you ride price trends with greater confidence and recognize upcoming reversals before they hit the crowd. Needless to say, I hold no monopoly on wisdom. I’ve learned my craft from those who went before me and still consider myself a student in the graduate school of hard knocks. If you think you see an error in this book, please write to me and let me know. How to Work with This Book We’ll begin by reviewing basic definitions and then look at many examples. I’ll invite you to take several reader exercises. We’ll review divergences in different indicators. We’ll explore divergences in different timeframes – from investing to day-trading. Keeping good records is the keystone of successful trading. Please stop for a moment before you do any exercises in this book. Open your word processor