Is Divergence a trustable trading indicator? Does it Spot Weakness and Strength in the market?
The Answer is Not Always and its not necessary to do so. Moreover its not your dog!
Just look at the 5 day charts of nifty showing three actionary points of negative MACD divergence in a common traders perspective and still the divergence is over extending. May be a common trader could be a trap to such divergence. But look at the chart the market is still trending higher inspite of Strong negative divergence and could missed a nice intraday trades because of fear of participating in longs or taking a wrong guess with shorts.
Will it work or not?
This how the question arises after seeing the chart. Divergence could extend as long it
wants. The right way is,If one is spotting a divergence he can stay cautious inspite of being
bullish/bearish as there is a chance of falling as a prey to such common mistakes. Cautiousness
can be expressed as maintaining tighter stop loss or making a good trailing stop loss. Such
actions will definitely bring a good sense of trading with less probability of lossing the capital.