What if there was a little danger to sell near the top and buy near the bottom of a process? What if you had been in a position just now, and you could predict where the ideal is to leave? Today’s lesson can help you not only lose less, but to get more out of the past, and buy your favorite Aston Martin earlier. How? In this way, with the way you learn today, the process will not change course without informing you.
What if you knew that a pair of currency would continue to fall, but could be traded at a short position or lower entry risk with a better price? For all situations described above, there is a solution called divergence trading as the lesson title suggests. In short, divergence can be observed by comparing Price Action and moving an indicator. It really doesn’t matter which indicator you use. You can use RSI, MACD, stochastic, CCI, etc.
A great thing about divergence is that you can use it as a prominent indicator, and after some practice, it will not be difficult to recognize. When you trade divergences correctly, you can achieve constant profitability. Another good thing about divergences is that you usually buy near the top and sell near the bottom. This greatly reduces the risk of your trade concerning your profit potential. Not great? Now, as you are sitting in your favorite car, pay attention to the rest of the lesson. Divergence Trading.
How can we trade divergences?
Only think of high ups and downs. The price and momentum in standard mode such as Hansel & Gretel, Batman & Robin, GZ & Beyoncé, salt and pepper move hand in hand. do you understand? Very good. Now things have become easier. If the price is going to create higher up, then the oscillator should be doing higher up. If the price is going to create higher bottom, the oscillator should be doing the same. If not, it means that the price and the oscillator are diverging. This is why divergence is called divergence.
The transaction through divergence is an extraordinary tool in your trading toolkit because your clients inform you that there is a transient potential in flow and you have to pay more attention to the deals. The use of divergence deals can help you identify the trend that is weakening, or reversing the momentum. Sometimes you can use divergence as a signal to continue the process. There are two types of divergence.
At this point, we will teach you how to identify and deal with these divergences.
Normal divergence trading
A normal divergence is a divergence which is used as a sign of the reverse occurrence of the trend. There are two types of common divergence: ascending and descending.
Normal ascending divergence
If the price is generating lower dips but the oscillator is generating higher dips, assuming that we have a normal ascending divergence. This usually happens at the end of a downtrend. After creating a second bottom, if the oscillator fails to create a new bottom, the price is likely to increase because price and momentum are usually on the same line. Below is a picture of an upward equitable divergence:
Normal descending divergence
Now, if the price is creating a higher top, but the oscillator is creating lower top, then we have a normal descending divergence. This type of divergence is generated in an ascending trend. After the price has created a second top, if the oscillator creates a lower top, you can expect the price to reverse and drop. In the photo below, we see that the price will be reversed after the second top is created.
As you can see in the above images, normal divergence is best used when we want to choose the bottom and tops. In fact, we look for an area where price is stopped and reversed. oscillator signal us that the momentum is changing, and despite the price has created higher top or lower bottom, the probability of its collapse is very low. Now that you realize what a common divergence is, it’s time to learn the second kind of divergence, the hidden divergence. Don’t worry. The hidden divergence is not as secret as you might think, and it’s no secret that you can’t understand. Just because it’s called hidden that it’s hidden in the current process.
hidden divergences trading
By this part of the lesson, you became familiar with the concept of normal divergence. In continuation, we return to hidden divergence. divergences not only transmit the signal of a potential trend reversal but can be considered as a signal of a continuing trend. Always remember that the process is your friend. So whenever you get a signal that the process goes on, you are happy! The hidden ascending divergence happens when the price is creating higher bottoms, but the oscillator is showing a lower bottom.
Ascending hidden divergence
Descending hidden divergence
At the end of the lesson today we look at a descending hidden divergence. We see this in the chart when the price creates a lower top but the oscillator creates a higher top. You must have guessed that this happens in a downtrend. When you see the descending hidden divergence, the currency pair is likely to continue its downtrend path.
If you are a process follower, then you have to dedicate a sufficient time to find hidden divergences. If this happens, you have the chance to get into the process soon and benefit from it. Not great? Recall that normal divergence of the trend reversal signal and hidden divergence of the signal are the continuation of the trend.
In the coming lessons we will discuss trading strategies of the divergences. We hope you enjoy today’s lesson on ITBFX technical analysis.