In today blog we partnered up with Chris Burgess to give us a break down on what Divergence is by demonstrating it with a real world example. Enjoy!

Divergence in the market has continued to increase this week. We ended last week with a bit of indecision, and those small moves have only magnified over Monday and Tuesday’s trading sessions. The S&P 500 (SPX) ended in the red for the first time in 5 trading days on Tuesday while still ending the day at a new all-time closing high.

However, if we go over to the index ETF, SPY, we can check out the volume of trading and see that volume has been trending down for the last several trading days.

This shows that momentum is slowing in this latest rally, and we may see a pullback before climbing higher.

This is where it’s very valuable to have both bullish and bearish positions in your portfolio. You never know when the market will turn, and having some positions that benefit in either scenario will help reduce your portfolio’s volatility and protect your downside.

It is critical to do thorough research of any security before trading. Combining high-quality trade ideas with structures that give you a great reward-to-risk ratio and proper risk management will be what sets apart the winners from the losers moving forward.

When it comes to trading structures, options can be the perfect way to structure your trades in this type of environment. Options have a built-in stop loss that can protect your position from sudden drops in value while still maintaining leveraged upside when things are going well. Combine these together, and you get a great instrument that can help your portfolio outperform in tricky situations.

In Closing

​If you want to learn more about options, Chris is always teaching about options at Tradesmart. Where he is dispelling common myths about options and showing you the power of options and what they can do for your trading. He always shows you real examples from his portfolio, both winners and losers, including a particularly juicy trade where a simple structure netted him a return of over 1,000%! If that’s something you’d like to learn then contact us at info@tradsmartu.com. Thank you!