Stochastic Divergence
Jul 11, 2018
The Stochastic Divergence indicator identifies potential trend reversals by detecting discrepancies between price action and the Stochastic oscillator momentum.
Usage
The tool is primarily used to spot exhaustion in current trends and potential turning points. It identifies two specific types of divergence:
- Bullish Divergence: Occurs when price reaches a new low (within the lookback period) but the Stochastic oscillator forms a higher low while remaining below the 20 level. This is highlighted by a green background and a lime cross marker.
- Bearish Divergence: Occurs when price reaches a new high but the Stochastic oscillator forms a lower high while remaining above the 80 level. This is highlighted by a pink background and a red cross marker.
Traders can use these signals to anticipate price bounces from oversold conditions or pullbacks from overbought conditions.
Details
The script calculates the Stochastic %K value based on the specified length. It then compares the current high/low of price and the Stochastic value against their respective highest/lowest values over a defined lookback period.
The logic requires the oscillator to be in extreme zones (above 80 for bearish or below 20 for bullish) to filter out weak signals and focus on high-probability momentum shifts. The divergence detection focuses on the immediate relationship between price peaks/troughs and the oscillator's relative strength.
Settings
- Stoch Length: Determines the period used to calculate the Stochastic oscillator.
- Lookback: Sets the historical window used to determine the highest highs and lowest lows for both price and the oscillator to confirm the divergence.
FAQ
How do I access Stochastic Divergence?
You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.
Can I use this for scalping?
Yes, by adjusting the Stoch Length and Lookback periods, the indicator can be tuned for various timeframes, including lower intervals used in scalping.
What do the background colors represent?
A green background indicates a Bullish Divergence (potential upward reversal), while a pink background indicates a Bearish Divergence (potential downward reversal).
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