The DiverStoch MetaTrader 4 indicator is a divergence based on a standard Stochastic. The indicator is used in spotting divergences. Once divergences are being spotted, it is a signal of an impending trend reversal and goes further to highlight the underlying strength or weakness that might not be easily spotted on the activity chart.
The Stochastic indicator does not have to be present on the activity chart. If a standard Stochastic is attached, the lines of divergence can be plotted on both the chart and also in the indicator window, with the indicator deploying the Stochastic settings.
On the chart above the solid line represents the classic divergence, the dotted lines are used to show reverse divergence. The color of the line can be altered, along with the output mode and language for a message that signals divergence.
A bearish divergence is said to be in place when the indicator does not move in-line with price i.e. when price hits a fresh high, but the stochastic is unable to reach a fresh high. A bullish divergence is said to be in place when price makes a fresh low, but the stochastic is unable to make a fresh low.
Divergence on the chart are meant to put the trader at alert of a possible change in the direction of price. While, divergence is not a signal indicator; it may require some time for reversal to take effect in view of a divergence. Hence, trading on just divergence is not advised.
Wait for price to break lower before going short upon having a bearish divergence. Also wait for price to break higher before buying during a bullish divergence.
MT4 Indicator Characteristics
Currency pairs: Any
Platform: Metatrader 4
Type: chart pattern/window indicator
Customization options: Variable (KPeriod, DPeriod, Slowing, DrawPriceLines, DrawArrows, drawDivergenceLines, displayAlert), Colors, width & Style.
Time frames: Any