At the same time, the technical indicator shows the respective tops or bottoms in a clearly visible upward or downward direction. Exaggerated bearish divergence is a divergence in forex is a situation in which price forms two tops approximately on the same line with some really slight deviations possible , while the technical indicator diverges and has its second top at a lower level.
Divergence Forex Trading Strategy
In this situation, there is a continued downward trend signal, and the best option for us is either to hold or to open a new short position. Exaggerated bullish divergence occurs when price creates two bottoms on relatively the same line, while the technical indicator diverges and has its second bottom at a higher level.
In this case, we have a continued upward trend signal, and the best choice for us is to hold or open a new long position. A number of different forex divergence indicators may be used in forex divergence trading. The most common ones of them are the following:. Moving Average Convergence Divergence MACD is a forex divergence indicator based on the evaluation of a technical indicator's exponential moving average values for 26 and 12 days or 9 days. In divergence forex trading, the MACD histogram in a way to reveal those moments at which price does an upward or downward swing, but MACD does not do so.
In fact, such situation illustrates the divergence between price and momentum. MACD is quite a straightforward and easy-to-use divergence forex indicator. Relative Strength Index RSI is a divergence forex indicator which is based on the assessment of a stock's internal strength and the subsequent comparison of its upward and downward price change averages.
The Divergence Cheat Sheet (To Help You Trade Divergence Reliably & Profitably)
This may be the best divergence indicator in forex for traders able to perform basic technical analysis. Stochastic indicator is used in divergence trading as a momentum indicator based on the evaluation of a stock's closing price and its comparison with such stock's price range over a particular period. The scheme of its use is quite the same as in the two previous indicators.
The divergence indicator in forex may be an essential tool for traders to identify signals of close market trend reversal.
What is a divergence?
Through the effective use of forex divergence and convergence, to may be able to avoid possible losses and maximize your profits. Develop your own best divergence strategy of forex trading, and you will see how convenient it may be a how effectively it will fill up your trader's arsenal.
By using convergence and divergence indicators, traders may effectively reveal higher and lower momentum, and therefore the possible trend continuation or reversal. Effectively using the forex divergence trading system may be one of the best tools to forecast the situation and to achieve the best trading results. Contents Overview of Convergence and Divergence in Forex Classic Regular Divergence in Forex trading Hidden Divergence Exaggerated Divergence Forex Divergence indicators Conclusion Due to the forex market's complexity, it is hard to find an optimum indicator to foresee the potential development of market trends, if any such indicator exists at all.
Overview of Convergence and Divergence in Forex Let's first define the terms convergence and divergence.
Divergence in Gold Trading is also used to predict the optimum point at which to exit an open gold trade. If you already have an open gold trade that is already profitable, a good method to identify a profit taking level would be to use the point where you spot this divergence gold trading setup.
Regular Versus Hidden RSI Divergence
There are two types of classic gold divergence, based on the direction of the current Gold trend:. Gold classic bullish divergence forms when gold price is making lower lows LL , but the gold indicator is making higher lows HL. The divergence gold example illustrated and explained below shows classic gold divergence setup. This divergence gold signal warns of a possible gold trend reversal. Classic bullish divergence gold trading signal warns of a possible reversal in the gold trend from downward trend to upward trend - because even though the gold price went lower the volume of sellers that moved the gold price lower was less as shown by the MACD gold technical indicator.
This divergence gold signal indicates underlying weakness of the downward gold trend. If you prefer to manage positions in parts, it was a chance to exit a part of your position. The market continued sliding sideways after the hidden divergence signal. But the trend resumed after a few bars and did not cause much frustration for us.
No approach is perfect. One of the drawbacks of the hidden divergence is that you might miss out on a series of pullback trades. Pointing out that a strategy does not work is messier than clean textbook examples. So go through it slowly to follow the analysis.
Then, it signaled us in at the worst possible timing , just as the trend was about to reverse. In this instance, the hidden divergence approach has failed the pullback trader. The hidden divergence leans towards sacrificing the number of trades for low-risk entries. Understanding this will reduce your frustration when you encounter multiple missed setups.
Instead, learning how to apply an approach and gaining experience is the path to consistent performance. Choose a solid pullback swing that stands out on the chart.
Divergence Forex Trading Strategy
It leads to a more reliable RSI hidden divergence. Regular divergences point to reversal, while the hidden ones get you into pullbacks. Such conflicting signals present a problem for our analysis.
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But unless other factors support a reversal, give more weight to hidden divergences. Recall the standard oversold and overbought RSI strategy. This basic strategy uses arbitrary levels of 30 and For instance, in Example 1, we were using RSI value 55 as the oversold level. Hence, this approach seeks to adapt to current market conditions.