SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

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

Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • How Much Do You Need to Start Trading Options?

    Theoretically, anyone can trade options. After all, there are listed options that you can buy for as cheap as $1.00. So what is the right amount of money you need before you can officially dip your toe in the water and give yourself a fair shot at becoming a profitable options trader

    By Pat Crawley,

    • 0 comments
    • 135 views
  • Options Strategies for Small Accounts

    Ask a handful of traders what they deem a “small account” to be and you’ll get probably get a few different answers. For the sake of this article, we classify a small account as having less than $5,000. There’s a number of obstacles you run into trading a small account, like the options in certain underlyings being too expensive for you to trade, as one example.

     

    By Pat Crawley,

    • 0 comments
    • 194 views
  • 7 Things I Wish I Knew When I Started Trading

    Options Trading can be very exciting and rewarding. But you should not be trading options before learning at least some basic facts about options. Options are very different from stocks.  This article presents 7 basic options trading facts that every options trader should know. Don't start trading of you don't understand them.

    By Pat Crawley,

    • 0 comments
    • 274 views
  • How LEAPS Differ From Short-Term Options

    LEAPS stands for Long-Term Equity Anticipation Security. Which is just a long-dated option, typically referring to those with expirations more than a year out. There’s no technical difference between LEAPS and shorter-term options other than the expiration date. They’re traded on the same exchanges and have the same rules surrounding margin and whatnot.

    By Pat Crawley,

    • 0 comments
    • 323 views
  • What Is An Implied Volatility Crush

    IV (Implied Volatility) crush when the implied volatility of an option takes a nosedive shortly after the conclusion of a catalyst like an earnings report or corporate action. The uncertainty around a company’s earnings report (or other significant catalyst) drives option prices up in the lead-up to the announcement, and down following the announcement, once the uncertainty is gone.

    By Pat Crawley,

    • 0 comments
    • 264 views
  • Top features of NinjaSpread

    There are two main goals of the scanner: show you hidden opportunities and save a lot of time with automated scanning. Let’s see what the top features are and how NinjaSpread can help your trading life.

    By Gery,

    • 0 comments
    • 825 views
  • Wide, flat SPX Diagonal Spread

    I love to trade SPX diagonals, especially when IV skew is higher than usual and I get a wider range of break evens. I know that time spread break evens are “theoretical” because they are dependent on the IV skew of the front and back month’s IV that changes all the time.

    By Gery,

    • 0 comments
    • 763 views
  • How Investment Trading Can Help Grow Your Business

    When it comes to growing a business, there are many different options out there. For example, you could try traditional marketing methods or explore new and innovative ways of expanding your company. One such way is through investment trading.

    By Kim,

    • 0 comments
    • 1,785 views
  • 3 Tips To Use When Getting Into Asset Management

    Asset management has proven to be a fruitful career for more than a few professionals in recent decades, explaining why it’s attractive to finance professionals and students. Not only is it a financially rewarding career, but it’s one of the more interesting ones to pick.

    By Kim,

    • 0 comments
    • 726 views
  • Extrinsic Value vs. Intrinsic Value

    Options are distinctly different from stocks in that they’re derivatives of another asset. The entire value of an option contract depends on factors outside of itself--it’s all based on the price of its underlying asset. Options are highly mathematical in nature, and in some ways, we can quantify the precise value of an option using a model like Black-Scholes.

     

    By Pat Crawley,

    • 0 comments
    • 830 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