Forex divergence: How To Trade Divergences in Forex

technical indicator

Meanwhile, a bullish divergence indicates a possible entry point for traders before the price begins rising. Forex divergence is one of the basic early signals. Divergence is easy to spot in any market and on any trading instrument.

The daily EUR/USD chart below gives a clear example of hidden divergence and the trend reversal that follows. This sort of chart pattern means that when the stochastic was overbought the second time, EUR/USD buyers couldn’t push any higher. So, the upside was complete even though EUR/USD couldn’t make new highs. Trading based on divergence alone is not accurate. I strongly suggest using additional indicators to confirm divergence.

trend reversal

Diagonal lines in the chart above highlight the MACD bullish divergence. Note that we shall define bullish and bearish divergence MACD according to extreme points of the MACD line , not the signal line. Regular bullish divergence is a perfect reversal signal. Just like with the bearish divergence, we should use the trendline breakout as an entry signal.

On the other hand, the MACD indicator at the bottom of the chart is making lower highs. This is called ‘Regular Bearish Divergence’ and indicates a fall in the price to come. Forex Profit CalculatorOn average, a Forex trader can make anywhere between 5 to 15% of the initial amount they invested in the market. 5 Top ADX Trading StrategiesThe Average Directional Movement Index strategy measures the forex market’s overall strength.

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When the price rises and the OBV falls, this may indicate a possible price reversal down in the near future. If the price is falling and the OBV is rising, the price will likely turn up soon. In the opposite situation, when the price enters the top red band, there should start a bullish trend. I have already mentioned that the Bollinger bands are well combined with the divergence signal. Bollinger Bands is a trend indicator, so we need an oscillator to define a divergence.

When looking to identify a divergence, you are watching both the price and your indicator of choice. You should look first at price action and whether it has been moving in any significant direction. Then, check your indicator below for peak formations signaling a divergence. You can trade divergences in more than 80 currency pairs with Divergence in stocks means that the stock price and indicator move in opposite directions.

How to trade hidden divergence?

These signals confirm the trend reversal, so we detail the entry point. Unlike the oscillators covered above, the Awesome Oscillator divergence indicator looks like a histogram, not like a curved line. The trading strategy with the Awesome Oscillator is similar to that of the MACD histogram. The above chart shows a bearish hidden divergence. The price highs are getting lower, while the MACD highs are getting higher.

Next, there is a regular positive divergence, so we enter a long. The signal to exit the trade according to the oversold zones appears only in June . Using the combination of MACD and Bollinger Bands as an example, we see that trend lines and other oscillators can be used to filter the divergence signal. In addition to MACD, we have already explored Stochastic, AO, and RSI.

What is the difference between divergence and confirmation?

If you are confused with different types of divergence, learn the major type – regular divergence thoroughly. The regular divergence helps to identify the trend reversal and enter a trade at the top or bottom of the trend. To read a bullish divergence, you should follow the price movement and the indicator readings. If, for example, the price hits lower lows in a bearish trend and the indicator is rising, this is a bullish divergence that means a potential upward reversal.

As we can see from the chart, the RSI has been moving lower along with the decline in price. Nine rules you MUST (should?) follow if you want to seriously consider trading using divergences. Divergences on shorter time frames will occur more frequently but are less reliable. Maintain vertical alignment with the PRICE’s swing highs and lows with the INIDCATOR’s swing highs and lows. Some indicators such as MACD or Stochastic have multiple lines all up on each other like teenagers with raging hormones.

I offer to base on the bar that closes beyond the trendline to enter a trade. After the first bar closes above the trendline, we enter a long. I marked it with the blue horizontal level on the chart. When you use trendline to detail entry points, you should be able to draw it correctly. The downward trendline starts from the first trend high to the last local highest high in our example. In the previous example, with the bullish trend, the approach was the same, but the trendline was drawn across the lows.

In the “pink” example, the pink lines show where divergence is present. As you can see, price made a lower low, while the indicator made a higher low. The slope of the price line is descending , while the indicator line is ascending . If you draw a line connecting two highs on price, you MUST draw a line connecting the two highs on the indicator as well. Next, let’s take a look at an example of some hidden divergence. It turns out that the divergence between the Stochastic and price action was a good signal to buy.

Regular Bullish Divergence

It is clear from the chart that the signal is delivered in January. So, you see that the combination of the MACD and Bollinger Bands makes up a perfect trading strategy. Besides, due to the special design of the MACD, the indicator gives a divergence signal both on the histogram and using moving averages. A hidden bullish divergence occurs when the price hits higher lows while the indicator forms lower lows.

What is The Exponential Moving AverageExponential Moving Average helps in understanding the market’s trend direction. Identify the existing trend direction in the market. Today, or practice with a demo account in just a few easy steps. MACD histogram defines the difference between the primary and the signal lines .

An additional entry signal is delivered when the indicator line goes outside the overbought zone. The entry level is marked with the blue horizontal line. EUR/USD stalls at a major level of resistance, and there is bearish divergence at the same time, the odds for a reversal have just increased. Unlike regular divergence, hidden divergence indicates a continuation of the trend.

This could signal that the downtrend is likely to resume. Forex Scalping StrategyScalping refers to trading currency pairs in the Forex market based on real-time analysis. With Forex scalping, you hold a position for a very short period and close once you see a profit opportunity. Wide Ranging BarsWide Ranging Bars are strong momentum indicators that help traders understand the market direction and identify ideal entry and exit points. Find out the currency pair highs and the technical indicator’s lows in order to spot the divergence level. A hidden bullish divergence is shown in the AUD/USD chart below.

Bollinger Bands will serve as a trend indicator. A stop loss is set a little higher than the high or a little lower than the low. We will take the profit when the indicator goes into the overbought/oversold zone.

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