SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

The meaning of divergent bars


When a daily session moves in the direction opposite the prevailing trend, it is called a “divergent bar.” As a reversal day, it signals a likely change from bullish to bearish, or from bearish to bullish.

A characteristic of the true divergent bar reversal is that the day’s session open at a gap from the previous day, and then closes within the range of the previous real body (in the upper half for a bullish move, or in the lower half in a bullish divergence).


The divergent bar signal is exceptionally strong as a reversal, assuming it is also confirmed by other signals. For example, on the chart of Tesla (TSLA), two examples of divergent bars meet these three criteria: sessions move opposite the prevailing trend, they appear with gaps, and they are strongly confirmed. Perhaps most important, they lead to reversal as predicted.

 

image.png

 

In the first example, a downtrend was underway until early September and represented a 100-point decline from the high of $380 to $280 per share. The downward gap leading to the divergent bar was exceptionally large, especially compared to the typical price pattern preceding this action. The single-day islands was divergent and was the middle session of the bullish abandoned baby, confirming the divergence as a bullish reversal.
 

In the second example, a downtrend had been set from early October and a 70-point move by the third week of October was significant. After a brief retracement, price appeared to resume the downtrend until the long white candlestick reversed the trend. It also served as the third session in the bullish reversal, a bullish doji star. This was the beginning of an 80-point rally to the end of the chart.


The divergent bar has exceptional predictive strength, assuming independent confirmation is also present. It tends to create an immediate reversal rather than a deferred or delayed one. Some other signals, with less specific strength or proximity to resistance or support, may experience a delayed reaction or even turn out to be false signals. The divergent bar is worth searching for, given its stronger than average signaling strength.


Look for strong confirmation in the form of candlesticks. The examples in the above chart had two exceptional three-session reversals. There are many more than could appear. The key is to find reversal signals that contain gaps. This conforms well to the requirement for divergent bars; however, signals with gaps also tend to be stronger than average.


Other forms of reversal may include a volume spike; but the definition of a true spike should be kept in mind as well. A spike is a one- or two-day period with unusually high volume, and an immediate return to the more typical volume experienced previously.


Momentum provides another worthwhile form of confirmation, especially Relative Strength Index (RSI) that has moved below index 20 (bullish oversold) or above index 80 (bearish overbought). Moving averages also are worth tracking, especially using a 50-day and 200-day together. The reversal is based on crossover; however, moving averages are lagging signals, so use them with caution.


An exception to this is Bollinger Bands. Even though its moving average-based middle band is also lagging, the standard deviation of upper and lower bands can provide useful signals of coming retracement or reversal. When Bollinger Bands is combined with the t-line (8-day exponential moving average), the resulting channel is a powerful trend tracking signal.


Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Cyclical versus Historical Volatility

    The interest in volatility for options trading is logical and understandable. However, the nature of volatility in not universally understood or agreed upon. In fact, it is more complex than most people believe. Options traders think of volatility coming in two forms, historical and implied.

    By Michael C. Thomsett,

    • 0 comments
    • 103 views
  • Pros and Cons of Paper Trading

    My first recommendation to all new SteadyOptions members is to start with paper trading, then start small and increase your allocation as you gain more experience and confidence. Over the years, we had a lot of discussions related to the benefits of paper trading, and this article will discuss some of the pros and cons.

    By Kim,

    • 0 comments
    • 154 views
  • Does “Managing Winners” Add Value to Short Strangles?

    Some option educators suggest short strangles have historically benefited from actively managed exit strategies. A widely popularized approach is to enter S&P 500 strangles at 45 DTE and exit at 50% of the credit received or a 21 DTE time stop, whichever occurs first.

    By Jesse,

    • 2 comments
    • 315 views
  • Fat Tails and Option Returns

    When it comes to calculating likely returns from option activity, traders contend with a variety of variations. Returns may be skewed (with declines in value more likely than increases), or unstable in many forms. Or the outcome might reveal itself in the form of a fat tail.

    By Michael C. Thomsett,

    • 0 comments
    • 213 views
  • What To Do In A low Yield Environment

    Investors over the world are struggling with yield in their portfolios.  Government investments are at historically low levels, with thirty-year treasuries basically declining every year for almost thirty years straight:

    By cwelsh,

    • 0 comments
    • 259 views
  • Option Terminology – Avoiding Confusion

    Options traders may easily fall into the habit of expressing ideas inaccurately. This might seem like a minor point, but in fact. It matters a great deal. Confusing and misleading language may lead to incorrect trade entry, and for those novices following more experienced traders, the use of proper terms is the whole story.

    By Michael C. Thomsett,

    • 0 comments
    • 431 views
  • Option Volatility and the Underlying

    Too often, traders may  make the mistake of associating option volatility with behavior of the underlying issue. However, if you employ a volatility assumption to model how an option is likely to change, remember that pricing models are theoretical. It is only useful for estimating the option risks. It does not indicate how underlying price will move.

    By Michael C. Thomsett,

    • 0 comments
    • 365 views
  • Before You Startup Your Own Investment Company, Read This!

    Often when we have had some success on the market, investors minds' begin to consider turning their solitary pursuit into a fully-fledged business. One that does not only line their own pockets but can help make some serious money for our client as well. 

    By Kim,

    • 0 comments
    • 663 views
  • Measuring “The Market”

    When you hear what “the market” did today, what do you think of? Most of us will think of one or more popular US stock indexes like the Dow Jones, Nasdaq, or S&P 500. But how well do these indices actually represent the total stock market? Dimensional Fund Advisors has created an excellent chart to help us answer this question.

    By Jesse,

    • 0 comments
    • 390 views
  • Managing Volatility Spreads

    Although traders often are attracted to hedged combinations (including spreads), some of the features are misunderstood. The spread may be viewed to manage risk, when in fact selection of an appropriate strategy may provide more potential when picked based on volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 539 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido