Stochastics divergence indicator with alert for NinjaTrader 8.

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Divergence is very common and useful in technical analysis. It indicates possible reversal signals when there are discrepancies between Stochastics and price movement.

Stochastic divergence is a powerful tool for traders because it signals potential trend exhaustion and upcoming reversals before they become obvious on the price chart. Here's why it's useful:

1. Early Warning Signal:

   • Divergence occurs when the price makes a new high/low, but the Stochastic Oscillator fails to confirm it with a corresponding new high/low in its reading.

   • This indicates that the underlying momentum driving the price move is weakening, even though the price itself is still pushing to new extremes. It often foreshadows a reversal before the price action itself definitively turns.

2. Identifies Potential Reversal Points:

   • Regular Bearish Divergence: Price makes a higher high, but Stochastic makes a lower high. This signals weakening upside momentum and a potential downturn.

   • Regular Bullish Divergence: Price makes a lower low, but Stochastic makes a higher low. This signals weakening downside momentum and a potential upturn.

   • Spotting these divergences helps traders anticipate where a trend might stall and reverse, identifying potential entry (bullish divergence) or exit/shorting (bearish divergence) opportunities.

3. Helps Avoid False Breakouts/Fakeouts:

   • When price makes a new high (like breaking above resistance) or a new low (like breaking below support), but the Stochastic shows divergence, it warns that the breakout might lack conviction and could fail. This can prevent traders from entering trades based on false signals.

4. Confirms Trend Strength/Weakness:

   • The absence of divergence during a strong trend (price and Stochastic consistently making new highs/lows together) confirms the trend's health.

   • Conversely, the presence of divergence objectively quantifies the growing weakness within an ongoing trend.

5. Complements Overbought/Oversold Signals:

   • While Stochastic readings above 80 (overbought) or below 20 (oversold) are common signals, they can persist for a long time in strong trends. Divergence adds crucial context:

     • An overbought reading with bearish divergence is a much stronger signal for a potential pullback than an overbought reading alone.

     • An oversold reading with bullish divergence is a much stronger signal for a potential bounce than an oversold reading alone.

Visual Example:

1. Scenario: An uptrend.

2. Price Action: Makes a new high (Higher High - HH).

3. Stochastic Action: Fails to make a new high; its peak is lower than the previous peak (Lower High - LH).

4. Interpretation (Bearish Divergence): The uptrend is losing momentum despite the price hitting a new peak. Sellers might be gaining control. A potential reversal down is likely.

5. Trader Action: Consider taking profits on long positions, tightening stops, or potentially initiating a short position (especially if confirmed by other signals like price breaking a trendline or bearish candlestick patterns).

Important Considerations & Limitations:

• Not a Standalone Signal: Divergence is best used in conjunction with other technical analysis tools:

  • Price Action: Support/Resistance levels, trendlines, chart patterns (head & shoulders, double tops/bottoms).

  • Volume: Increasing volume on the reversal move confirms the divergence signal.

  • Other Indicators: RSI, MACD, Moving Averages.

  • Candlestick Patterns: Reversal candles (shooting star, hammer, engulfing patterns) at the divergence point add weight.

• False Signals: Divergence can sometimes appear, but the trend continues. This is more common in very strong trending markets. Confirmation is key.

• Timing: Divergence signals a potential reversal, but it doesn't predict when it will happen. The reversal could take time to materialize.

• Type Matters: Understand the difference between regular (reversal) and hidden (continuation) divergence.

• Timeframe: Divergence on longer timeframes (Daily, Weekly) is generally more reliable than on shorter timeframes (5-min, 15-min).

Stochastic divergence is useful because it provides traders with an early, objective signal of weakening momentum within a trend. This allows them to:

• Anticipate potential reversals for better entry/exit timing.

• Avoid chasing breakouts that lack momentum (false breakouts).

• Manage risk by signaling when a trend might be running out of steam.

• Gain confidence in overbought/oversold signals when divergence is present.

By incorporating divergence analysis into your trading strategy alongside other confirming factors, you significantly improve your ability to identify high-probability trading opportunities and manage risk effectively. Remember, it's a warning light, not a crystal ball – always wait for confirmation.

Features and inputs:

1. Instant signal on current (last) bar, no repaint.
2. Three range mode:Short, Mid and Long to check divergence.
3. Four plots can be used from other NinjaScript: Bullish Regular Signal, Bearish Regular Signal, Bullish Hidden Signal and Bearish Hidden Signal
4. Alert when a signal appears.
5. Select different sound alert files.
6. Enable to show lines between Highs and Lows.
7. Please note: it doesn't work in Renko chart.
8. Market Analyzer with alert. You can add new sound files to your NT8\sounds directory.
9. Wait 1 bar: enable this new feature will display the signal 1 bar later in order to check the trend direction of both price and related indicator, otherwise, it will display the signal on current bar. We consider this feature as a 1 bar confirmation for divergence signals.

There will be a 'H' drawn under a hidden divergence.