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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. If you are looking to trade financial assets as CFDs you will need to understand the difference between the cash and futures market.
How To Trade A Divergence – A Step By Step Divergence Trading Guide
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.
The stochastic oscillator is a very useful tool for technical analysis. A detailed guide to stochastic trading is in the article devoted to the Stochastic Oscillator. This is a basic strategy you can base on in trading forex. Enter the terminal without even registration in a couple of clicks, spot the divergence, and build your trading strategy. Extended bullish divergence is accompanied by rising lows.
What is the difference between divergence and confirmation?
This signal is marked with the green circle in the above chart. The above chart shows a bearish hidden divergence. The price highs are getting lower, while the MACD highs are getting higher. Let us explore all possible types of divergence signals and analyze their examples in the charts. Forex divergence is defined as a case when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator. The most useful way to use a momentum indicator is to know what strategy to use.
- It just means that the trend is progressing unchanged.
- Regular divergence suggests a soon price reversal.
- Any divergence is discovered only according to the highs or lows in the price chart and on the divergence indicator.
- A regular divergence in RSI occurs if the price of an asset sets a new high or low, but the RSI indicator does not confirm this by moving in the same direction.
The trading strategy with the Awesome Oscillator is similar to that of the MACD histogram. Each forex divergence indicator offered above is unique and has its own features and accuracy degree suitable for particular financial markets. The price lows, connected with a blue line above, are getting higher. Therefore, there is a hidden bullish divergence that means the trend continuation. Any divergence is discovered only according to the highs or lows in the price chart and on the divergence indicator. For example, the asset price is moving up, but the oscillator line is moving in the opposite direction.
Stochastic hidden divergence indicator
Keep in mind that a divergence just signals a loss of momentum, but does not necessarily signal a complete trend shift. In my own trading strategy, divergences are a big part for one of my setups and in combination with other signals. I do not recommend trading divergences by themselves but they are a good starting point. To analyze the divergence, you can use any oscillators. Although all those oscillators are different, the divergence signals are similar. Each of the oscillators delivers divergence signals.
Reproduction or redistribution of this information is not permitted. This is often a signal that the market has run out of steam, setting up the potential for a solid risk-reward reversal trade. Confirmation is occurring when the indicator is moving in the same direction as the price. Rising prices are accompanied by an indicator that is moving higher too. Vice versa, if the price is moving down, the indicator is following it lower. The best types of indicators to use when looking for divergence are oscillators.
Best divergence trading strategy
Milan Cutkovic has over eight years of experience in trading and market analysis across forex, indices, commodities, and stocks. He was one of the first traders accepted into the Axi Select program which identifies highly talented traders and assists them with professional development. This is why experienced traders trading divergence often test the market with half their normal position size before getting their full position on the trade. Divergence is one of the strongest reversal signals you can get. But do keep in mind, this is a reversal trading strategy whereby you are fading the current trend.
So, when the indicator goes back into the negative zone, we enter a short trade. A stop loss is set a little higher than the first high of the convergence formed (red line). It is clear from the above chart that the take profit, which is two times more than the stop loss, is hit by the price and exits our trade with the profit. To detect the divergence, you need to draw the line across the lows or the highs of the candlestick chart. Draw another line across the extreme points drawn by the indicator line or the histogram. The strongest signal is delivered by regular divergence.
How to trade a regular divergence
Divergence signals tend to be more accurate on the longer time frames. Maintain vertical alignment with the PRICE’s swing highs and lows with the INIDCATOR’s swing highs and lows. The highs or lows you identify on the indicator MUST be the ones that line up VERTICALLY with the price highs or lows. Multi-timeframe trading describes a trading approach where the trader combines different trading timeframes to improve decision-making and optimize… Below we see how price made 2 divergences but price never sold off. The divergences, thus, just highlighted short-term consolidation.