• Oscillator Analysis
  • Direction
  • Area
  • Divergences

Three Dimensions Analysis

  • Direction – Bullish or Bearish
  • Area – Overbought or Oversold
  • Divergence – Bullish or Bearish

Direction – Bullish or Bearish

  • The same techniques that are used for analyzing price trends can be applied to momentum
  • When the indicator goes below its trendline we have the bearish signal
  • When the indicator goes below its moving average we have a bearish signal and vice versa
  • A trend reversal in momentum is not always associated with a similar reversal in the price – PRICE IS THE BOSS

Area - Overbought & Oversold

  • The financial markets are essentially driven by psychological forces
  • Our emotions move from one extreme to another, from greed to fear, from hope to despair
  • This is what causes momentum indicators to fluctuate from oversold to overbought levels
  • Momentum reflects crowd psychology and measures the intensity of the emotions of market participants
  • Banded oscillators fluctuate between 0% and 100%
  • For RSI and IMI extreme levels are those beyond 70% and 30%
  • For Stochastic extreme levels are those beyond 80% and 20%
  • Other oscillators are unbanded and traders must manually identify overbought and oversold lines
  • Extreme levels are manually determined where the indicator previously topped or bottomed
  • Extreme momentum readings indicate a possible correction in price
  • Signals are used by some traders to exit or enter new positions against the previous direction
  • A bullish signal occurs when the indicator goes below 30 and then crosses above it from below
  • A bearish signal occurs when the indicator goes above 70 and then crosses below it from above


  • Divergences can be seen by comparing the price of a security with the movement of an oscillator
  • If price is making higher highs, the oscillator should also be making higher highs, and vice versa
  • If they are NOT, that means the price and the oscillator are diverging and that’s why it’s called “divergence”
  • Divergence serves as a warning that the trend is about to change or a correction is imminent


Types of Divergences

  • Classic
  • Hidden
  • Complex

Classic Divergences - Bullish

  • If price is making lower lows, but the oscillator is not, this is considered to be bullish divergence
  • This normally occurs at the end of a downtrend and can sometimes signal that the price will rise
  • It is also called positive divergence because the technical position is said to be improving

Classic Divergences -  Bearish

  • If the price is making a higher high, but the oscillator is not, then we have bearish divergence
  • This normally occurs at the end of an uptrend and can sometimes signal that the price will drop
  • It is also called negative divergence because the technical position is said to be deteriorating

Divergences - Interpretation

  • Momentum oscillators serve as a leading indicator and divergences are used when detecting tops and bottoms
  • Momentum reversal precedes reversals in price and is regarded as a warning of a possible price reversal
  • However not all divergences result in good signals especially during a strong trend

Hidden Divergences - Bullish

  • Hidden bearish divergence occurs when the price fails to move higher but the oscillator rises
  • This normally occurs at the end of an uptrend and can signal a bearish trend reversal

Complex Divergences

  • Price trends are determined by the interaction of different time cycles
  • Most momentum oscillators, reflect only one cycle, since they are constructed using a specific look-back period
  • To reflect more than one cycle we should compare two momentum indicators constructed from two different periods
  • Complex divergence is a divergence between two oscillators of different periods instead of an oscillator and price

Complex Divergences - Bullish

  • When the shorter starts to rise and the longer continues to a new low, cycles are “out of synch”
  • This normally occurs at the end of a downtrend and can signal a bullish trend reversal

Complex Divergences - Bearish

  • When the shorter starts to drop and the longer continues to a new high, cycles are “out of synch”
  • This normally occurs at the end of an uptrend and can signal a bearish trend reversal

Divergences - Strength

  • The more the divergences, the greater their significance
  • Failure of the price to correct after a divergence, indicates that when the correction begins, it will be much more severe
  • The greater the time between one divergence and another, the greater their significance
  • Divergences in a longer period oscillator are considered more important than divergences in a shorter period oscillator
  • Closeness to Equilibrium
  • The value of the oscillator at the time of the divergence is very important
  • The closer the oscillator is to equilibrium, the larger is the expected sell-off

Divergences - Trap

  • Most of the time, divergences proceed in a fairly orderly way
  • A final directional wave develops and pushes the oscillator back beyond its previous level
  • This move will prove to be a “divergence trap” after which price will reverse as previously expected
  • When the short covering process ends, reverse as previously expected

Divergences - Summary

  • Classic divergence occurs when price makes a new high/low but the oscillator does not
  • Hidden divergence occurs when the oscillator makes a new high/low but the price does not
  • Complex divergence occurs when the longer period oscillator makes a new high/low but the shorter period oscillator does not
  • Look for bearish divergences in uptrends and bullish divergences in downtrends, in a range they do not work well
  • Divergences do not represent actual buy or sell signals but act as an early warning of a possible price reversal

The Story of Desmond Leong

Desmond is your average trader. He started off blowing up 7 (or more.. lost count) accounts amounting to more than 500k, tested over 30 Expert Advisors (EAs) to no success and spent over 10k on stupid useless courses.

Today he runs an award winning trading team and provides market analysis and webinars to some of the largest brokers such as IC Markets, XM, Axi, Tickmill, FXCM, VantageFX, easyMarkets and more.

He now has a simple goal: Creating an army of traders who trade profitably together and keep each other accountable. Guiding them with the most comprehensive no-BS free tutorials so that no one ever needs to go through the pain he went through himself to become a profitable trader.

My Trading Strategy


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