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Trading Strategy: How to trade divergence with technical indicators

what is divergence in forex

Many traders also make a mistake when they analyze the divergence of the price highs and the indicator lows. Extended bullish divergence is accompanied by rising lows. In the bearish divergence, the highs are getting lower.

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A trend reversal can be seen when there is regular divergence. In the event that the divergence is bearish, the price chart will get ready to move downward. It is wise to get ready to buy when there is a bullish divergence since the chart will rise. By the way, there are various examples of divergence in the forex market. The key is using the oscillator to correctly identify its type.

Bullish Regular Divergence

At the right time, only these two tools will save your deposit and help you fix your profit. If trade divergence signals, you set a stop loss above the highest high for a bearish trend and below the lowest low for a bullish trend. Like in the previous case, we expect a false reversal of the trend. The MACD moving average (do not confuse with the signal line!) goes below the zero level for a moment and goes back.

what is divergence in forex

To find out a regular divergence bearish, you should analyze the price highs and the highs painted by the indicator. The price should be making higher highs, but the highs on the indicator are getting lower (the right side of the table). The regular bearish divergence signals that the bull trend should turn down soon, so one could enter short trades. Stochastic is another popular oscillator used in divergence trading. It is composed of two lines that often interact with each other. Like the RSI, a stochastic divergence indicator finds out the overbought or oversold state of the market.

Regular Bearish

The price has a strong chance of going higher after one of these two figures. When traded correctly, divergences can consistently prove profitable. The most interesting aspect of divergences is the possibility of buying near the bottom or selling near the top. This limits the risk of trading relative to the potential gain.

what is divergence in forex

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SMT Forex Divergence – The New Way for Looking at Divergence

The difference between 150 and 250 is 100, and the difference between 350 and 250 is 100 again (no change in momentum). However, between 425 and 350, the difference is 75 (momentum has started to slow down). Prices are rising, but the rate at which they are rising is slowing. While this is visible if you look closely, it is usually easier to visualize the momentum separately and compare it to the price.

  • We enter a trend earlier when the candlestick closes in the green zone and the MACD moving averages while the histogram goes into the negative area.
  • If you see any little bumps or dips between the two major highs/lows, do what you do when your significant other shouts at you – ignore it.
  • Divergence has helped me to become a better trader by becoming more objective.
  • Extended divergence forex is similar to the hidden divergence.

We have on the H1 at point 1 and 2, bearish regular divergences. It’s the perfect entry to rejoin the bears at the end of the small rally/pullback. When looking at bullish or bearish SMT forex divergence, it will depend on which trading asset we are looking at.

Bearish Divergence

Convergence derives from the Latin word ‘convergo’ – get close. Therefore, convergence is a type of divergence, when the price trend and the indicator line are meeting. Any divergence is discovered only according to the highs or lows in the price chart and on the divergence indicator. Although divergence is a simple signal, many people are confused with divergence trading forex. It happens because there are many types and classifications of divergences.

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MACD isn’t technically an oscillator but generates divergences using histograms. Yet, it tends to show less of these set-ups than other tools. However, this is also a benefit because the signals are more reliable due to the rarity. Divergence in the Forex market is a constant phenomenon and is one of the most powerful elements of technical analysis. However, it is not simple to see divergence on a chart. Stochastic is a momentum technical indicator that works by comparing the last closing price with a range of previous prices over the last 14 periods.

By watching out for these discrepancies, traders can take advantage of high reward-to-risk trades by entering short positions when the Divergence appears. For example, suppose the price of a currency pair is increasing while its RSI indicator is decreasing. In that case, this could indicate that it has become overbought and potentially ready for correction.

  • So, you must also compare the highs of the price to the highs of the indicator.
  • The bullish divergence RSI setup shows two troughs in the RSI indicator window forming higher lows while the price shows lower lows.
  • If the trade becomes favorable, on the other hand, you can continue to scale in until your intended trade size is reached.
  • Its main task is to show on the chart all the differences between the price and local extrema of the oscillator.

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