Forex trading divergence

Conversely, when prices are making lower highs and lower lows, the oscillators tend to print the corresponding lower highs and lower lows. This is what we already knew as convergence.

• What is a divergence?.
• How To Trade A Divergence – A Step By Step Divergence Trading Guide;
• How to Trade RSI Divergence – 4 Practical Entry Techniques – Trade Revenue Pro!
• How To Trade Divergences;

When price makes a high or a low and the oscillator fails to confirm the same, it is known as divergence. By spotting these divergences, traders are usually signaled to a potential change in the direction of prices. Divergences are formed when there is a mismatch between the price action and the momentum, measured by the oscillator relative to price.

Quite often you will notice that divergences tend to occur near support and resistance levels. Therefore, divergence trading can be used not only to time the entry into a trade within a trend, but it can also help you to understand support and resistance levels.

While divergences are broadly classified into 4 types, the underlying theme among all the four types of divergence is that it shows price exhaustion when the oscillator fails to confirm the new highs or the lows. Divergences take place all the time and across all time frames. However, the best results come when divergence is spotted on higher time frames such as 4-hour sessions or higher.

One of the most common mistakes often made with divergence trading is that traders expect the price to behave in a certain way when a divergence is spotted.

This is wrong! In the charts that are outlined in this article, you will find a few divergence setups where price moved in the opposite direction, contrary to what the divergence was telling you. It is, therefore, important to understand that traders should look at other confirmation tools which will be covered in a later article before trading the divergence setups. There are 4 types of divergence, which are broadly classified into two categories:.

What is Forex divergence?

With each of these two categories, you have a bullish or a bearish divergence. Therefore, the four types of divergences are summarized as:.

The chart below gives a quick overview on the above 4-types of divergences. The following two charts show examples of the above four types of divergences that occur on the price chart. In the below examples, we make use of the Stochastics oscillator.

But feel free to experiment with other oscillators mentioned earlier in this article. Divergence — Example 2 Spotting divergence takes time and does not expect results overnight. The best way to get started with spotting divergence is to use one of the many custom divergence indicators that are available for MT4. These automated indicators spot the divergence for you which can act as a good starting point to understand the highs and lows. In terms of which oscillator to use, the RSI makes for an ideal oscillator to train your eye to spot the divergences.

Simply switch the price chart to a line chart and then add the RSI, which makes for an easier way to train your eye. John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets.

John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics. ADP beats estimates. China Remains Locked Down. What are Range Bars? Trading strategies using the Range bar. This is what we call a divergence and in the screenshot below, the divergence signaled the end of the uptrend and it makes a downtrend possible.

Classic technical analysis tells us that a trend exists when price makes a higher high — but like too often, conventional wisdom is seldom right and usually simplifies things too much. A trader who only relies on highs and lows for his price analysis often misses important clues and does not fully understand market dynamics. Spotting a divergence on your momentum indicator, thus, tells you that the dynamics in the trend are shifting and that, although it could still look like a real trend, a potential end of the trend could be near.

A divergence does not always lead to a strong reversal and often price just enters a sideways consolidation after a divergence. Keep in mind that a divergence just signals a loss of momentum, but does not necessarily signal a complete trend shift. A divergence alone is not something that strong enough and many traders experience bad results when trading only with divergences. Just like any trading strategy, you need to add more confluence factors to make your strategy strong. Below we see how price made 2 divergences but price never sold off.

The divergences, thus, just highlighted short-term consolidation. Location is a universal concept in trading and regardless of your trading system, adding the filter of location can usually always enhance the quality of your signals and trades. The screenshot below is a great example: On the left side, you see an uptrend with two divergences. However, the first one completely failed and the second one resulted in a massive winner.

What was the difference? When we take a look at the higher time frame on the right we see that the first divergences happened in the middle of nowhere and the second divergence formed at a very important resistance level yellow line and yellow arrow. Such an approach will impact your performance in a big way. Divergences are a powerful trading concept and the trader who understands how to trade divergences in the right market context with the correct signals can create a robust method and effective way of looking at price.

Thank You, Rolf! Good article, especially these comments : When we take a look at the higher time frame on the right we see that the first divergences happened in the middle of nowhere and the second divergence formed at a very important resistance level yellow line and yellow arrow. Very helpful to master the market! To date i have not found a trading strategy with a higher winning percentage than divergence combined with support and resistance levels.

How to Trade a Hidden Divergence

Thanks Rolf for this interesting article. I was aware of this but you showed me the correct way. This article will surely help me in my trading strategies. Personally I cannot trade divergences as they will always happen when a market is very strong or very weak. This is because price can keep making higher highs or lower lows but the indicator cannot as it has levels that it cannot go beyond. They are so common that you will get stopped out repeatedly. Thank you Rolf, this realistic and smart article has shown the way and greatly benefited me, thank you again.

Dear Rolf, I happen to see your article when I was browsing for divergences, I personally a strong believer in trading with divergences and I just always wonder why many times my divergences based trades were failed and now I understood clearly that combining the divergences along with support and resistance is something more crucial for spotting winning trades. Save my name, email, and website in this browser for the next time I comment. This content is blocked.

Accept cookies to view the content. This website uses cookies to give you the best experience. Agree by clicking the 'Accept' button. What is a divergence? Comments 24 Daniel. Good article.