How To Trade A Divergence A Step By Step Divergence Trading Guide

what is divergence in forex

If the price makes a lower low, the oscillator should also be making a lower low. If you decide to implement forex divergence, diving further into the smart money concepts and correlated assets can be an edge-defining approach. Join thousands of traders who choose a mobile-first broker for trading the markets.

Apart from fundamentals, traders and analysts of financial instruments use a number of indicators to figure out what might happen to the price of a certain instrument. These indicators offer a simple method of recognizing patterns and predicting which way the price will trend. Regular Divergence indicates the end of a trend and signals a trend reversal. In other words it indicates that if the price was trending downward for some time, it will soon start to trend up - and vice versa of course. A bullish divergence represents upward price pressure and a bearish divergence represents

downward price pressure. Most traders use volatility indicators to get the buy or sell signals .

Stochastic for trading divergence

It is known as SMT (Smart Money Technique) Divergence. You can think of this as a signal from institutions that they are stepping in, and the price will see an explosive move soon. This divergence occurs when the market is already in an uptrend. The price makes two consecutive lower lows, while the indicator makes a lower low followed by a higher low. This typically suggests the correction phase is about to end, and the price will probably soon continue trending higher.

Two subsequent lows or highs where the histograms have not returned to the zero line are not proper divergences. Often enough if a trader would zoom in on the 1-time frame a proper divergence would become noticeable there. The action is moving at a less stable/sustainable pace and the likelihood of a correction or reversal increases. The divergence-convergence analysis measures the power a currency has at one point in time with another point in time.

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A regular divergence is used as a possible sign of a trend pause or trend reversal. A regular bullish divergence occurs when the price is making lower lows (LL). Price and momentum are expected to move in line with each other. If the price makes a new low, but the oscillator fails to make such a new low itself, it is likely that the price will retrace or reverse. Learn the divergence trading strategy before you try picking a trend reversal.

Just like with the bearish divergence, we should use the trendline breakout as an entry signal. Now let see practical trading divergence signals in different financial markets. The EURUSD chart above displays the extended bearish divergence MACD, which suggests the downtrend continues. There could be slight deviations, but the highs are roughly equal in the first and second charts. The signal appears in the sideways trend, which is a typical feature of the extended divergence.

High Probability Forex Divergence to Find Explosive Moves

The above chart shows an example of the bullish divergence stochastic. The second low of the indicator is lower than the first one in an uptrend. I enter a trade when the confirming green bar closes immediately after the intersection of the stochastics at the second top. I set a stop loss below the lowest low in the divergence. I take profit according to the stochastic rules at the second retest of the overbought zone. You can also exit the buy trade when the price breaks through the trendline or just set a take profit at a distance twice as long as that of the stop loss.

what is divergence in forex

With divergence, there can be positive and negative signals. The blue price line is a linear regression line, while the red line in the bottom window simply connects momentum highs. This is a simple depiction of a price-momentum divergence that serves to remind you the upmove will be ending. You can use any of a number of indicators when seeking divergence, including MACD, RSI, and the stochastic oscillator. The most commonly seen indicator in Forex is the stochastic oscillator, probably because it works better on shorter timeframes than does MACD.

What Do Divergence and Convergence Look Like on a Chart?

The one below here is a sharp move up that causes divergence. Although this is a great, and very common question,  the type of indicator you need to use is not as important as you think. Now, the word "Divergence" may sound scary, but trust me, it's actually a very fun tool to use when it comes to trading.

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The logic behind divergence to analyse the market price is that the indicator is showing a slowdown in momentum of the price. The momentum of the price will often change before the price itself. Divergence in the Forex market is a constant phenomenon and is one of the most powerful elements of technical analysis.

Setting up your trading platform for divergence

In addition to MACD, we have already explored Stochastic, AO, and RSI. These indicators are effective at handling the divergence signal. I propose to put together a comprehensive divergence day trading strategy and test it in practice.

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